FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, October 22, 1998

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[English]

The Vice-Chair (Mr. Nick Discepola (Vaudreuil—Soulanges, Lib.)): Good morning. In accordance with its mandate under Standing Order 108(2), the committee resumes its study on the report of the Task Force on the Future of the Canadian Financial Services Sector, commonly known as the MacKay task force report.

I'd like to welcome this morning, from the Council of Canadians, Mr. Leo Broderick; from Fair Isle Ford Sales Limited, Mr. Myron MacKay; from Hyndman & Company Limited, Mr. Fred Hyndman, managing director; from the College of Piping and Celtic Performing Arts of Canada, Mr. Scott MacAulay; and from P.E.I. Mobile Home and Trailer Sales, Mr. H. Wayne Hambly. Welcome to all.

The format is roughly a five- to 10-minute presentation from each representative, and then we will open it up to the members of Parliament for questions. This morning's session goes until about 10.30. I hope we will have a good dialogue.

The committee this year has split up, as in the past, between the east and the west. We have been in Newfoundland already, as well as the Halifax-Dartmouth area. We were in Saint John, New Brunswick yesterday and the day before. Next week we'll be in Ottawa, and the week after in Montreal. We're combining this with the pre-budget consultation hearings we had here yesterday. That report on the budget consultations will be due to the minister by mid-December, and the report for the recommendations to the MacKay task force will be due in March sometime.

I'd like to start with Mr. Broderick, if you could, please.

Mr. Leo Broderick (Member of the Board of Directors, Council of Canadians): Thank you very much.

I am here representing the Council of Canadians. The Council of Canadians has over 100,000 members across the country and a few hundred members here in Prince Edward Island. I'm going to cover a number of areas.

I want to begin by stating that Canadians need better banks. We are certainly opposed to the mergers, and I will go into the reasons.

First of all, the bank mergers will kill jobs in our communities. If the bank mergers go ahead, the banks already have flatly refused to protect jobs. We can look to the Americans to tell us what to do about bank mergers. In that country, when banks merged, and quite recently, up to 30% of employees were dismissed. If that happens in Canada, tens of thousands of Canadians—the industry is saying as many as 30,000—could lose their jobs. Many middle-level managers, predominantly women, would face layoffs. In this province, we will see quite a number of jobs lost if in fact these mergers go ahead.

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The second reason is that bank mergers will mean poorer service for our communities. Already customer service is not great from banks. Service charges are high. Without the threat of mergers, branches are closing and automatic tellers are increasing. Already, human contact and personalized service from banks are decreasing rapidly. This is particularly difficult for new Canadians and the elderly. We're seeing that seniors in this country and in this province are becoming alarmed at the lack of human contact when they do approach the banks. It's going to be particularly difficult for rural customers. We need to ensure that all of these people have proper service from banks.

If the mergers go ahead, things will only get worse. With the four banks that are merging, we could see up to half the branches across this country closing. Even though banks say at the moment that this is not the case, it looks as if we will find half of those branches closing. Here in Prince Edward Island, that would be catastrophic. Right here in this city, we could see major closures and job loss.

The third point I want to make is that if we allow the bank mergers, low-income members of our community will be severely harmed. Banking is already difficult for low-income Canadians and for low-income Islanders. It is reported that 400,000 Canadians and hundreds of Islanders do not have a bank account. Banks often require identification, a minimum balance, and even a job before business will be transacted with a customer. It is extremely difficult for people who do not have bank accounts to have any kind of service from these financial centres.

Many Canadians are paying exorbitant credit card interest rates, up to 28%, because they can't get any other form of credit. The banks are now closing branches in all areas of the country. If the mergers go ahead, the banks will grow more powerful, and those most affected, particularly the poor, will continue to be neglected by the financial community.

The third point I want to make is that the bank mergers will harm small business in our community. In the past 15 years, small businesses have created 80% of Canada's employment growth, but they've received only 10% of the bank loans. Research from 1995 to 1997 indicates that lending to small and medium-sized businesses actually has decreased, and this is very pronounced in Atlantic Canada. In Atlantic Canada the research indicates that in terms of bank lending to small and medium-sized business, the record is the worst in the country.

Experience in the United States, where bank mergers have occurred, indicates that fewer dollars will be made available by banks for small business. Instead of allowing these mergers, we should be insisting that our banks be forced to make credit available to small businesses. That's what our government should be doing.

The fifth point I want to make is that the bank mergers will create little economic development in Prince Edward Island. In fact they will take away economic development and jobs. On that alone—and right across the country it will be the same story—the bank mergers should not be allowed.

I want to look at this whole situation in the global context. There's no question that if the bank mergers are allowed, the banks will continue to make huge profits. I did pass around to you earlier some information that indicates that they're now making record-breaking profits, and I'll talk a little about that.

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The fact is that our big banks now are very big and have world-class profits. Our five banks are the largest corporations in Canada. Each of the five banks' assets are greater than the federal government's annual revenues and greater than the total revenues of the provinces and territories. Four of the big five banks lend more each year than the federal government spends.

Our big banks are also successful internationally, operating in over 120 countries. On a world scale, CIBC is in the top 10 in major international finance areas, Toronto Dominion has the third-largest discount brokerage, and Scotiabank is tenth in big business syndicated lending.

According to a March 1998 report by two Bank of Canada economists, profitability, not size, is the most important factor for the success of banks. According to Fortune magazine, three of our big five banks—the Royal Bank, CIBC, and the Bank of Montreal—are among the top 15 most profitable banks in the world and are more profitable than five of the 10 largest banks in the world.

The facts show that our banks are very large and will likely not only survive but also prosper. If we allow the mergers, many more profits will go to the shareholders and to the executive salaries, meanwhile neglecting the needs of Canadians.

The second fact is that global competition is not a threat, despite the banks' claims. There are now 43 foreign banks in Canada—fewer than in 1987, when there were 59—and their combined assets amount to only $92 billion, 7% of total banking assets in Canada. That's not much compared to the $1.1 trillion assets of Canada's big five, at 80% of the total.

Foreign banks have faced significant barriers to entering Canada for over 30 years, and will continue to face barriers even after changes are made under a 1997 WTO agreement. The cost of setting up branches, advertising, training staff, and attracting customers mean that, as Finance Minister Paul Martin has stated, foreign banks will never offer serious competition to our big banks or offer service in the vast majority of the communities across Canada. So the idea that the mergers must occur in order for these banks to compete globally is not a legitimate claim.

Point three is with respect to the global issue. Our big banks treat many customers poorly now, when they have not yet merged. What will the situation be like if they do? In 1996 and 1997, the National Quality Institute conducted surveys of over 8,000 Canadians regarding their satisfaction with 21 industries. In these surveys, banks ranked in the bottom five both years. In addition, at least 400,000 adult Canadians, as I mentioned earlier, do not have a bank account.

The banks' own statistics show that lending to job-creating small and medium-sized businesses has decreased, as I mentioned earlier. It is predicted that if these mergers go ahead, they will continue to decrease, because the concentration of the banks' interest will be on international megaprojects.

Fact four, there is no question that the proposed bank mergers will hurt Canadians. If the two mergers were approved, the two new mega-banks would control 70% of the banking assets in Canada—a higher level of concentration than in any other G-7 country. That's the issue Canadians must be most concerned with. We do not need a greater concentration of power in the hands of fewer banks in this country. We need more competition, not less.

The mega-banks would be more than twice as large as the next-largest bank in Canada, which would be the Scotiabank, and they would also control 75% of small and medium-sized business lending and 80% of credit card purchases. I've referred to the aspect of the credit card, which is an extremely serious situation for many Canadians. The CIBC-Toronto Dominion merger would have 70% of the Canadian discount brokerage market, and the four largest banks in Canada would control 72% of consumer loans in Canada. We can only imagine what the effect of that would be: we can expect higher interest rates.

This concentration of market control would severely limit customer choice and allow the mega-banks to abuse their power by raising fees, cutting service, or both. And we do know their record in this area is dismal at the moment.

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The final point I want to make with respect to the whole question of global interests is this. Canadians can have better banks; we do not have to have bigger banks. We must call on the Liberal government and Finance Minister Paul Martin—who has the final say, we're told, on this issue—to not allow the mergers.

If enough Canadians speak out, the government will have to stop the mergers and pass bank accountability laws. We must make our banks in this country more accountable to the government, and in the end, to citizens. We can have better and fairer banks. Even the MacKay report has suggested that we need more competition.

When we look at the world economic crisis, all people who are studying this issue point to the number one problem as the whole aspect of the deregulation of national and international economies. What we need—and the MacKay report points to this—is a more regulated system.

If we allow the mergers, we will continue to go the way of many countries. In Japan, their biggest banks have to be bailed out with public dollars. This is the most serious threat to Canadians. If we allow all resources and control to go into the hands of two banks, what if the banks fail? Canadian taxpayers and Canadian citizens will have to bail them out, as has happened in Japan. So we need more regulation and more control, not less regulation and less control, over our banking institutions.

In conclusion, in depressed areas of the country—and to some extent we qualify here in Atlantic Canada—banks traditionally have cared very little about these areas in terms of their community involvement. Even though the Royal Bank has begun a propaganda campaign in this province to insist that it is a partner with communities, the Royal Bank's record in serving Islanders is not great, and we can expect that it would be even less if we allowed these mergers.

So we're recommending that the government of this country not support mergers, and that as soon as it says it will not allow mergers, it should introduce legislation to make banks more accountable. And they can be. If we use credit union principles, which make credit unions responsible to communities, we can bring control and reason to the banks in this country.

I will conclude by referring to the information I gave you on the four banks. When we look at the salary of the chief executive officer of the Royal Bank and see that his income is $3.2 million, we know something is definitely wrong in this country.

Shareholders and executives are not the only ones we have to please in this merger question. Citizens are the most important. We must address the needs of Canadian citizens on this issue of bank mergers, not the needs of the chief executive officers of the four banks and the shareholders. They're making enough as it is. It's time for Canadians to get a break on banks.

Thank you.

The Vice-Chair (Mr. Nick Discepola): Thank you very much, Mr. Broderick.

I'd like to now call upon Mr. Myron MacKay from Fair Isle Ford Sales Limited.

Welcome, Mr. MacKay.

Mr. Myron MacKay (Owner-Operator, Fair Isle Ford Sales Limited): Thank you and good morning.

My name is Myron MacKay, and I've owned and operated Fair Isle Ford in this community for the past 25 years. I'm just a small businessman, literally and figuratively, who would like to continue doing into the future what I've done successfully for those 25 years—that is, earn a living, employ people in the community, help create economic activity by purchasing supplies and services from other local businesses, provide quality products and services to P.E.I. consumers, and contribute both time and financial resources to local causes in an attempt to make Charlottetown an even better place to live, work, and raise a family.

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Don't get me wrong; I'm not completely unselfish. Some of the motivation for doing all these things is to create a positive image in the community and to make Fair Isle Ford more visible in the local market.

Having said all that, there are many challenges to being a small business person. We struggle through recessions, high interest rates, and low consumer confidence. Sometimes a good night's sleep is very difficult. We cope with these occurrences, we make the necessary decisions and sacrifices to survive, and we look forward to the better days ahead that we hope are just around the corner. These are things we expected to face when we decided to risk our resources by becoming small business owners.

In the U.S.A. it has been said that what is good for General Motors is good for the economy. Obviously, as a Ford dealer, I don't necessarily agree with that. But I do believe that what is good for small business is good for communities where those businesses are located. A strong small business presence is vital to keep communities growing and vibrant.

The report of the Task Force on the Future of the Canadian Financial Services Sector fails to recognize the importance of small business and the impact its recommendations may have on the small business community.

In the case of automobile dealers, we as a group will pay a heavy price if bank branches in all the communities across the country are allowed to lease vehicles directly to consumers. A decision made in Toronto could put massive resources in place to aggressively compete with every automobile dealer in Canada.

Smaller dealers in small communities are struggling to survive now. It's tough to stay current as training and technology continue to grow. Many of them would simply disappear, along with their jobs and community participation. Larger dealers in larger markets would survive, but with smaller budgets and fewer employees. No independent dealer could compete effectively against the Canadian banking system, if banks decided to target their customers.

Where would the consumer then look for service and customer satisfaction with their vehicle? I suspect not to the banks. However, this is leading into a presentation that I made to the task force last year, and there's no point in repeating those arguments, because my views haven't changed. I provided copies of that submission to the lady this morning, so they are available to you.

Some comments in the task force report indicate a lack of understanding of how the automobile business works at the dealer level. On page 97 of the report, a statement is made that the manufacturers' finance arms control 70% to 80% of the leasing market. That is partly true. The fact is, however, that local franchise dealers conducted that business directly with the consumer, utilizing programs and financing made available by those finance companies. Automobile dealers compete against each other, but not against the factory finance companies. We should not have to compete against the banks.

Also on page 97, the report states that only about 45 dealers lease as many as 200 units per year for their own portfolio. This raises two points, the first being that the average dealer in Canada sells only about 300 units a year, so it's obvious that they wouldn't be leasing 200 units in their own portfolio. But secondly, the task force failed to say that out of the larger-than-average group of dealers, a large majority would lease more than 200 units per year, if you included the retail lease along with their in-house leasing system. The consumer doesn't care if the lease is retail or in-house. He's just looking for the best offer he can get.

Don't be misled. If banks are allowed to lease directly to consumers, they will compete for 100% of the retail business, not just the portion that's now leasing.

On page 98, the report infers that concerns about tied selling and access to confidential information on the part of deposit-taking institutions can be resolved by legislation. These things can be done so subtly that you would seldom, if ever, prove an illegal activity.

Many places in the report refer to the fact that the banks in the United States have the right to directly lease automobiles. What is not stated is the fact that Canadian banks are national in scope, with hundreds of branches coast to coast and with one central location setting the policy. Certainly our banking system is much more concentrated than theirs. Huge resources and e-mail could put every bank branch in the country in competition with local dealers almost instantaneously.

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In my estimation, the task force recommendations are based mainly on two factors: what is good for the banks and what the task force perceives as being best for the consumers. What is good for the banks is not my concern, although certainly I want the banks to continue to operate effectively and profitably and be strong players in the economy. What is best for the consumer is more my concern, and little thought appears to have been given to the impact on local businesses.

I do not believe that in the long run consumers would save money by leasing vehicles directly from the banks. I do believe that the overall ownership experience with their vehicle would be less satisfying if they dealt with a bank and if dealers were left with less revenue to invest in their businesses. A major factor in satisfied consumer experience is the relationship that begins with the sale or lease of a vehicle and carries through into the service and warranty needs of that vehicle.

In many cases—I know in our Ford system, and I'm sure with other manufacturers—after the warranty expires, things are done for customers. The factory people participate in that cost and dealers participate in that cost, and the consumer pays a portion. Certainly if the banks sell something to a consumer, it's going to be very difficult for a dealer to pay a portion of costs where they've received no revenue from the sale.

Dealers generally have worked very hard over the years to improve consumer satisfaction. The dollars spent on sophisticated equipment and training are a testament to that. Another distribution source for vehicles that results in less revenue to the dealer group would have a significant impact on their ability to continue to serve the driving public in the manner they have come to expect.

Just as a matter of interest, the average dealership makes a net profit of approximately 1.5% on sales, before taxes. So you can see that it wouldn't take much revenue loss to turn a 1.5% return on sales into a loss. It would be significant. Any loss of revenue would be significant.

Obviously time is of the essence. I originally thought we'd have a little more time, but a couple of points from the task force perhaps could be brought up here.

On page 100 they refer to the fact that consumer groups generally have not joined the debate over the light vehicle leasing issue, and the Consumers' Association of Canada has not raised this issue with the task force. A survey of Canadian Federation of Independent Business members indicates that a large majority oppose the granting of additional business powers to banks.

There are a number of other issues, but because of the time factor, I will let them go. Hopefully they'll be raised in questions. Thank you. I appreciate your time.

The Vice-Chair (Mr. Nick Discepola): Feel free, Mr. MacKay, to elaborate on anything you have not covered in your responses to members' questions. Thank you.

We'll move along to Mr. Fred Hyndman, the managing director of Hyndman & Company Limited.

Welcome, Mr. Hyndman.

Mr. Fred Hyndman (Owner and Managing Director, Hyndman & Company Limited.): Thank you very much, Mr. Chairman, ladies and gentlemen.

I've distributed to you a brief summary of opinions that I wish to share with the committee, and I'll just take a few moments.

My name is Fred Hyndman. I come to you in my standing as owner and managing director of Hyndman & Company Limited, an insurance agency concern that was started by my great-grandfather here in Charlottetown in 1872. In the succeeding 125 years, this business has been owned by four succeeding generations of the Hyndman family, and one of the fifth generation is now completing a successful apprenticeship. My personal association with the insurance industry is of 37 years' duration, and I am qualified, by examination, as a fellow of the Insurance Institute of Canada.

Presently our firm, together with its subsidiaries, operates 13 offices in Nova Scotia, New Brunswick, and P.E.I. It also underwrites operations in Îles-de-la-Madeleine, Quebec. As of this date, we number 102 full-time employees, of whom 78 are resident in Prince Edward Island. We serve approximately 20,000 clients in all branches of insurance and have reason to believe we're one of the larger firms in our classification in the Maritimes.

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Ours is a very old firm, with a history that echoes much of the economic and commercial development of this province. I often marvel at the changes and challenges that have been met by the old firm: the decline of the P.E.I. shipbuilding industry, Prince Edward Island's entry as a Canadian province in 1873, the great recession of the 1880s, the introduction of electricity and the telephone, the Great War, the Depression, the Second World War, the proliferation of the automobile, and more recently the introduction of computers, to say nothing of massive changes in the types of insurance, the methods of its distribution, evolving legislative requirements, and constant and creative competition. Quite literally, this firm has evolved from handwritten policy contracts issued in sterling to laser-printed, computer-generated documents in Canadian dollars, all right here in Prince Edward Island.

One need look no further than the new Confederation Bridge to the mainland to realize that the future will bring new external challenges and opportunities. We must and will continue to embrace change and adaptation.

I hope this little historic dissertation has helped to make my point, which is that the independent insurance agency and brokerage system has a proven record of innovation and adaptability in its service to the needs of insurance buyers of Prince Edward Island, as well as for its own commercial success, continuity, and vitality.

The government's discussion paper, which was the precursor of Mr. MacKay's studies, noted:

The nation's efficiency, competitiveness, depth of employment opportunities and quality of life are enhanced by an effective financial services sector.

And who could dispute that? Those same words, though, ladies and gentlemen, need to be applied not only to the nation but to any province or region if there is to be a collective, positive national outcome.

In this small province we are particularly sensitive, perhaps even paranoid, in the matter of maintaining or building the financial services infrastructure upon which our efficiencies, competitiveness, employment opportunities, and quality of life depend. Our concerns are well founded as we contemplate persistent and pervasive centralizing trends in the past century. During recent years, these centralizing trends have been exacerbated by additional forces of consolidation in the financial services sector. The effect of these centralizations and consolidations has been a reduction in competitive players seeking to serve our community and the removal of much expertise and decision-making ability from our marketplace.

It's imperative that public policy balance the lure of cost efficiencies and world-class size with the necessity of providing effective, competitive services with a local, physical presence to—to use the words of the study paper—“enhance consumer welfare” in this province.

It's therefore important that you refuse the recommendation by the task force that the persistent requests from chartered banks for the privilege of distributing a broader range of insurance products to their branches be granted. That is on the sound basis that such a privilege would surely further erode local expertise and employment.

It is true that we of the smaller and more remote communities are paranoid and fearful for our future in the face of massive consolidations and centralizing or globalizing trends. There is perhaps a Wal-Mart psychosis that infects us all as we see our commercial and business community under attack. I submit that the economic freedoms that permit and tolerate a Wal-Mart attack on an established business community do not, though, extend to the financial services sector, which is a creature of public policy, and which must anticipate that the same public policy that grants it powerful privileges will also circumscribe, limit, and regulate to the end that an essential and unique range of financial services is widely available to Canadians.

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The Insurance Act of Prince Edward Island, section 372, states as follows:

Any person— who induces— or coerces— through the influence of a business or a professional relationship— to give preference— in respect to the placing of —insurance —is guilty of an offence.

It would be interesting to know what threat or perceived threat our legislature had in contemplation when it passed this amendment in 1951. The measure applies specifically to life insurance, but it has in it a reflection of a then public policy concern for the protection of consumers from being pushed around in the placement of their insurance. Do note that this law does not even require that harm have been done for the offence to have occurred.

In this legislation lies a root of concern that troubles me very much as I consider the chartered banks' requests for permission to deliver insurance through their branch system.

In most instances, the presence of insurance is a prerequisite to the granting of credit. It seems self-evident to me that the disparity between the very small number of credit-granting banks and the availability of competing providers of property and casualty insurance provides incredible possibilities for undue influence or tied selling by a bank that holds the precious availability of credit on the same premises where there might be an insurance department.

Who can believe in Chinese walls or internal guidelines, especially in a smaller community, which may only have one or two chartered banks? The presence of a retail insurance department on the premises of a chartered bank will constitute an undue influence, to the detriment of consumer freedom of choice and open competition. It is a short distance between innuendo and intimidation.

In recent discussions on the issue of banks retailing insurance, the focus has almost always been on the sales aspect of the business relationship. I urge your committee to consider customer-bank relationships, as they would be corrupted during the claim settlement function of insurance. The claim is the raison d'être for insurance, and a distressed consumer who has suffered the misfortune of a loss does not need the added stress of his banker being privy to cash movements in matters that may have no bearing on his credit.

Another aspect of bank-insurance relationships has received little notice but has prudential implications. Experienced insurance underwriters have long recognized the relationship between policyholders' poor financial state and increased physical risk. The inherent conflict set up when a banker learns first of financial ill health may precipitate either a cancellation of the insurance and collapse of the credit or a continuation of the insurance as support to that credit. Does this conflict not inevitably lead to an adverse result where either the credit, the insurance, or the consumer loses?

It's not far-fetched to extend this argument to levels where profits of one department of a bank may lead the other into unsound commitments. During the past few years we have observed that profits of our major chartered banks have soared, to recently reported returns of almost 20% on equity. We have also observed bank assets increasing sharply.

There are those who urge legislative reform to permit our banks to grow larger and become better able to compete in the global economy. This may be desirable, but I fail to see what possible impact on global competitiveness would result from banks being granted extended privileges to retail insurance domestically, unless it were further massive profits earned in a preferred and sheltered environment where they could control insurance placements and rates.

The 1992 revisions to the Bank Act permitted banks to own insurance companies that trade at arm's length from their banking business. Today we see several examples, particularly CIBC, which has built a sizeable business competing on a level playing field, without the advantage of in-branch distribution.

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In conclusion, lest there be any confusion or illusion, my remarks are from one who has, on his own behalf and on behalf of his 102 employees, a clear vested interest in the status quo. These remarks make no pretence of objectivity, but do attempt to lay before you my grave concern at the permanent damage that would be inflicted upon us should the resources of Canada's massive chartered banks be permitted to attack us from their advantageous position, as has been created by public policy in its goal of providing a secure, progressive banking industry for Canadians.

Thank you, sir.

The Vice-Chair (Mr. Nick Discepola): Thank you, Mr. Hyndman.

I'd like now to go to P.E.I. Mobile Home and Trailer Sales, with Mr. Wayne Hambly, general manager, please.

Welcome, Mr. Hambly.

Mr. H. Wayne Hambly (General Manager, P.E.I. Mobile Home and Trailer Sales): Thank you, Mr. Chairman.

I'm Wayne Hambly, representing P.E.I. Mobile Home and Trailer Sales plus our parent company, Hambly Enterprises Limited.

I'll give you a little background. We're a 32-year-old company in the city of Charlottetown. We have 28 employees. We're a retail business that retails manufactured housing and recreational vehicles, and another arm of our business retails home furnishings and appliances.

My purpose for being here this morning is to lend support to the bank merger process that we've been discussing. I'm not here to particularly take a position on some of the issues that were stated in the MacKay report, but rather to express my concern that banks have to be allowed to grow and be competitive in the global world.

As a small private business operator, I am speaking in favour of the proposed merger for the following reasons.

It is important to have a strong national banking system with the ability to meet global competition and remain strong to service the needs of Canadian business. To quote from the highlights of the MacKay report:

In an increasingly competitive global marketplace, with enhanced competition in our domestic markets, strong and internationally competitive Canadian financial institutions bring benefits to all Canadians.

My concern is, if we don't allow our Canadian banks to position themselves to meet the global competition of larger institutions, then the end result will be a weakening of our Canadian banks. Competition is here, and more is coming. Our Canadian banks need the opportunity to meet this competition on a level playing field.

I might just give you a personal example of how that's actually happening. Less than a week ago, in my office I received a phone call from a lady somewhere in Texas representing the Wells Fargo bank. She wanted to send me an application to allow me to apply for a credit line of $100,000. She went on to tell me that it was a one-page application, she would fax it to me and I could fax it back, and the deal would basically be done. I thought that was rather interesting, because it's nice to have people phone you up and say they just want to loan you $100,000 and be done with it. So I asked her if she knew where Prince Edward Island was. There was a pause at the other end of the line and she said, “Somewhere in Ontario. Ontario is a province of Canada, isn't it?”

My point here is this. If foreign banks are allowed to come into our marketplace and loan money to businesses when they don't even know where those businesses are located, how can they understand the needs of a small business in a community such as ours in Prince Edward Island? When times are good, they'll accept all of the profits they will get on loaning the money, but when times aren't so good, how can they provide the kind of leniency and understanding that small business needs to get through tough times if they don't even know where we're located? If our banks are going to be competitive with this kind of competition, we have to give them the opportunity to do that.

It is important for small businesses in our country to have banks that understand our situations and have the means to respond to the individual needs of our small and medium-sized businesses. In the proposed merger of the Royal Bank and the Bank of Montreal, there is a plan to create a new bank for small and medium-sized business. This bank will have its own president and management team, with a focus specifically on the main engine of our economy, which is small business. It's this kind of benefit that I see will come from the merger of these banks, as they together will have the resources to reach this type of goal.

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The second reason I support the merger of banks, besides being stronger and being able to deal more effectively with our country, is to be supportive to the communities they do business in. It's interesting that in every major fund-raising event that happens in our community—and I don't think we're any different from any other community—we look to the banks to be a major supporter of those projects. And they should support those projects. They have a real responsibility to shoulder their share of support to the community needs, particularly if they're doing business in that community.

Again, this raises the concern of foreign banks doing business in our community without a physical presence in the community. How can we hold them accountable for the kind of community support that we think banks should give our communities?

I can give you another example of that sort of thing in our own community right now, not in the banking industry, but in the telephone business. We have a local company here called Island Tel, which you're probably very familiar with. They're a tremendous supporter of our community in whatever initiative may be required, whether it be supporting youth programs, medical programs, or whatever. They always come to the table and they're always very generous with their support.

On the other hand, we have all kinds of people now coming via the telephone, wanting to compete in this marketplace here, and being successful as well. But those people have no responsibility, nor is there any way to hold them accountable, for providing the kind of community support we need from large corporations.

Coming back to the banking situation, if we don't allow our banks to become competitive in the global marketplace and if they weaken their position, then we see that as a weakening all the way down the chain until we even get into our communities here.

This community support is a very important role that our financial organizations play. I agree with the statement in the highlights that each federally regulated deposit-taking institution and life insurance company should be required to provide one or more annual community accountability statements to describe its contribution to the community and to identify emerging community needs to which it intends to respond. It is encouraging to hear someone such as the chairman and CEO of the Royal Bank, John Cleghorn, publicly state that he endorses this type of recommendation. Again, it is a major benefit to our communities if we have a strong, competitive banking system.

It has been stated that consolidation through merger is a valid business strategy, but it is not the only business strategy. This is true, but it is a strategy put forth by successful Canadian banks that understand the challenges ahead and have recognized a way to meet those challenges. We should give them the opportunity to meet these challenges on a level playing field, with the organizational flexibility that will make it possible.

I thank you for the opportunity to present my views on this subject and look forward to some discussion later on.

The Vice-Chair (Mr. Nick Discepola): Thank you, Mr. Hambly.

I'd like to now conclude with Mr. Scott MacAulay, please.

Welcome, Mr. MacAulay.

Mr. Scott MacAulay (Executive Director, College of Piping and Celtic Performing Arts of Canada): Thank you very much.

After hearing Wayne speak, it almost seems as if we're reading from the same book. He drew a lot of similar conclusions that I'd like to make reference to.

I felt compelled to come here today because of the support that the Royal Bank has given our business here in Prince Edward Island. The Royal Bank has seen the potential in our company, which is just an eight-year-old company. We started it as a dream eight years ago, and now we have an international reputation for excellence in Celtic performing arts. We're a non-profit, community-based organization and a registered Canadian charity.

• 0855

The more I investigated this issue, the more I really felt compelled to come here and speak today on this issue.

Canadian banks face serious competition in the broader financial services market, with trust companies, mutual fund and insurance providers, leasing businesses, credit card companies, and more all in play. Canadian financial institutions are competing with foreign institutions that possess enormous economies of scale and the corresponding competitive advantages that entails.

Entry of these foreign players has come about through the federal government's liberalizing of the entry requirements for new players in the Canadian financial institutions marketplace. The government seems to support the notion of a single global banking market.

The U.S. and foreign entry into our market has grown exponentially in recent years. For example, MBNA credit cards, which I think Wayne was referring to, have over 600 million direct mailings per year. It's very difficult to compete with that. Other companies, such as Fidelity Investments, Franklin Templeton, and GE Capital— General Electric Capital does everything in the financial services business except print money, and maybe they'll get into that next.

The Vice-Chair (Mr. Nick Discepola): The banks won't let them.

Voices: Oh, oh!

Mr. Scott MacAulay: The Merrill Lynch takeover of Midland Walwyn has the goal of becoming Canada's number one financial services firm. That is their on-record goal. That's something for all of us to take note of.

I'm all for free competition, but Canadian banking institutions have to be given the opportunity of playing on an even playing field. In order to compete with these huge foreign financial conglomerates, Canadian banks need the advantages that come with combining forces.

As executive director of a company whose mission is deeply rooted in the community, I have grave concerns about the cold, calculating, and impersonal threat that these multinational financial institutions pose. The Royal Bank of Canada is the single largest philanthropic organization, regardless of sector, in Canada. They are community-minded in their corporate philosophy and they are community-minded in their corporate giving.

We need only look at the telecommunications industry situation, which Wayne referred to a little earlier, to see what's going to happen in the banking industry. Multinationals such as Sprint have stormed the marketplace and increased their market share. However, they are taking increasing amounts of hard-earned Canadian money directly out of the country, with little or no reinvestment in this community or in this country. Companies such as Island Tel, on the other hand, have a sterling record of community investment and reinvestment. They don't take their money and run. They give back, and they take care of their customers.

In conclusion, I'm all for free and open competition in business, but implicit in the notion of a free and open marketplace is the free and open market choice of companies to combine their strengths and resources so as to compete successfully and on a level playing field with these huge foreign financial service conglomerates. As has been said, if the strength of a country is rooted in the home, next the community, then the region, and finally the country, who better to serve us than our own Canadian-owned and -operated companies?

In the deep history and tradition of the great Canadian financial institutions, their merging is a logical and very necessary next step in competing fairly in this new corporate landscape that will carry us into the next millennium. I feel very strongly about this. We've had a tremendous relationship with the Royal Bank, and we want to keep this Canadian banking industry growing. The only way we're going to be able to compete successfully internationally is to allow the Royal Bank to pursue the notion of a merger and try to compete on a global scale in this new landscape and atmosphere in the Canadian banking industry.

I welcome discussion on any of these points. Thank you.

The Vice-Chair (Mr. Nick Discepola): Thank you, Mr. MacAulay.

Colleagues, we have about seven minutes each, so use your time wisely.

Mr. Paul Szabo (Mississauga South, Lib.): How many do you have?

The Vice-Chair (Mr. Nick Discepola): I have two. Is that fair? I'll use my discretion.

Mr. Ritz, please, from the Reform Party.

• 0900

Mr. Gerry Ritz (Battlefords—Lloydminster, Ref.): Thank you, Mr. Chairman.

Thank you, gentlemen, for your presentations here today. I think we'd have a very interesting debate if we just let you guys go at it. There are definitely some differences of opinion there.

A few things that have been said tweaked my interest. Mr. MacAulay, you said that other companies come in and storm the marketplace. Well, that gets them a toehold and a chance at a market share, but the only way they maintain that share over time is service, service, service. It's like real estate; the three big rules are location, location, location. With anything, whether it's banking or car leasing or whatever you're talking about, it's service, service, service.

Mr. Scott MacAulay: I think that's why you've seen so many people sign up to Sprint and then bail out, because they can't provide the service.

Mr. Gerry Ritz: Exactly, so why would foreign bank entry into this country be any different? Some people may pick up the Wells Fargo thing and find out that they're talking about 9% instead of 6.5%, and they may get onside and then boom, they're gone. So how can they maintain that toehold unless they're offering products that people want offered to them and can maintain?

In my talks with my own constituents at home and in the hearings we've had, I don't hear any screaming desire from people to open this thing up, “Let's have bigger banks, let's go, go, go.” We have to do it in an orderly way. We can't pull the trigger and have this thing start off. We all have to be at the same starting point. We have to maintain the insurance companies, the car leasing, and so on until everybody gets to that same starting gate.

We have the Y2K problem coming up with the banks. Why they want to merge and then go into that problem together beats the heck out of me.

Mr. Scott MacAulay: I hope you didn't misunderstand what I was saying. What I was saying was that I'm all for a free, open marketplace, and I'd welcome the multinationals here, but how can you welcome the multinationals and all the resources that they bring to the table and not allow the Canadian financial institutions to combine forces to compete?

Mr. Gerry Ritz: One point you're missing is that if these big mega-banks are formed in Canada, they become multinationals as well.

Mr. Scott MacAulay: I think the whole point is that these institutions are rooted in the community and in the country, and they know the client best, because they're here.

Mr. Gerry Ritz: Yes, Mr. Hambly made a couple of points there. At one point he said, “banks that understand our situations”. In my dealings with banks, as a small businessman, a farmer, and so on, I've found they have an attitude that one size fits all, which is far from the truth. My business ethics and conduct are certainly different from those of the next guy down the street, and yet banks try to make a blanket statement that we all fit in that same pigeonhole. We don't.

So we need more diversification, if you will. We need more competition in order to keep everybody on their toes. Everybody thrives with competition.

Having said that, I'll move to the car dealer here, Mr. MacKay. In car leasing, are you concerned with the competition? The banks are basically doing that now. The Royal Bank has had a program for years where there's a final payout on a car. That's basically leasing. You make your payments all along, and at the end of the third year, you make your final payment. Does that type of competition concern you?

It still comes down to service. I buy that new car. Whether I buy it from you or from a bank or whoever, I have to have it pre-dealer serviced, which comes back to you. Then there's warranty work, which comes back to you. Will people not maybe go with the bank one time only and then come back and say, “Gee, I didn't get the service I should have if I had bought it from you, Myron”?

Mr. Myron MacKay: I don't know what the public's perception is going to be. If I'm still there, maybe they'll come back to me.

The buy-back program that the Royal Bank has right now— All the banks have some sort of program that gets them access into this market, but in the actual negotiations, the consumer deals with the local franchise dealer, does his business with them, and then the paperwork goes through the bank afterward. My concern is if that consumer can go directly to the bank branch and walk in and buy or lease a car—

Buying and leasing are seamless these days; there's really no difference between buying a car and leasing a car. You're paying a monthly payment for the use of the vehicle. If you tell a consumer he can buy a car for $500 a month or he can have the use of it for $400 a month, invariably he looks at that $100 a month and says it's better for him.

Mr. Gerry Ritz: But there's no asset being built.

Mr. Myron MacKay: No, there's no asset being built, although there's not much asset being built anyway. If you have a car loan over four or five years, at the end of two years, you have a negative asset, not a positive asset, because you're going to owe more money on the vehicle than it's actually worth, in most cases.

• 0905

When you talk about competition, we have a small town here of 30,000 people. There are 12 different manufacturers, represented by 14 different dealers, and we're all competing for the same consumer. At the same time, there are something like 14 bank branches in this town. If all of a sudden somebody says they have access to the vehicle market, it could have pretty dramatic consequences. You're more than doubling the number of places that can sell or lease a car to the driving public.

Mr. Gerry Ritz: I understand your point, but when you talk about the feasibility of those 14 bank branches having a compound ready to have the car come in and offer it to their customer and so on like that, how do they put all of that together to be viable in the market? You have the product. People buy from inventory. They don't like to sit and order. You have the inventory. You have the service. You have the technicians. How could they even be competitive, unless they're offering it at half the money or something that really entices people?

Mr. Myron MacKay: Well, the public can be different sometimes. Of course the banks can have a lot of influence as well and have a lot of customers. People who are already customers of the bank could be influenced to do that.

The public, in some cases, would come to our place and look at vehicles, select a colour, and do all those things, then go and do their business at the bank. The bank may be dealing with a dealer that they've negotiated a price with, at cost or very little over cost, so they just simply acquire the vehicle and deliver it to what was my customer.

My customer expects me to maintain the physical presence. I don't see the banks making a major investment in bricks and mortar.

Mr. Gerry Ritz: So the weak link in that scenario is Ford itself, in allowing that inventory to go through the bank instead of to you?

Mr. Myron MacKay: Well, it wouldn't have to be Ford. It could be a dealer somewhere. We're like everybody else—

Mr. Gerry Ritz: Except there's no more solidarity then.

Mr. Myron MacKay: Well, the competition says we can't have solidarity, and it's just competitive. Some guy who's a little bit weak financially and needs a loan might very well say, “Sure, I'll supply you all the cars you want at invoice.”

Mr. Gerry Ritz: Yes, it's a real conundrum, isn't it?

The Vice-Chair (Mr. Nick Discepola): Thank you, Mr. Ritz. You're right on time.

We'll move right along to Mr. Pillitteri.

Mr. Wayne Hambly: Mr. Chairman, I have just one quick comment to respond to Mr. Ritz's remark.

I would disagree with the statement you made that when you deal with your bank, one size fits all. That may very well be true in your case. It has not been our experience, over the last 30 years of dealing with local banks here, that one size fits all. In fact we've found that when they understand the local situation and are able to understand the significance of what's happening locally, they can be very flexible to deal with the needs of the day.

Mr. Gerry Ritz: That's your good luck.

The Vice-Chair (Mr. Nick Discepola): Do you have an idea of what the account manager turnover was in your region? In the 25-year history you've had, how many account managers have you dealt with?

Mr. Wayne Hambly: In 32 years, I think we've had six.

The Vice-Chair (Mr. Nick Discepola): That's an average of every five years. The average in the industry is probably every two years. So you are fortunate.

Mr. Wayne Hambly: I could be wrong, but they're the ones who stand out. The other ones may have just come and gone.

The Vice-Chair (Mr. Nick Discepola): Thank you.

Mr. Pillitteri, please.

Mr. Gary Pillitteri (Niagara Falls, Lib.): Thank you very much, Mr. Chairman.

Good morning. I welcome your presentations.

Mr. Broderick made the remark that banks don't service well. I beg to differ with you, but just wait until I am where I'm going, sir. The banks in Canada serve us well. I've been dealing with banks. I'm an entrepreneur and a small businessman. I've dealt with banks going back to the early 1960s, and I have been served quite well. If you go to other parts of the world, you'll see really how well our Canadian institutions are serving us.

Some of the presenters have said our banks need to merge to have the size and scale to compete with the multinationals. Well, gentlemen, they are multinationals already. They are competing all over the world. Of their total income, 40% is offshore. All of the chairmen of the six chartered banks have said that there has been no deal in this world, inside Canada or outside Canada, that they had to walk away from because they were not large enough. They're pooling their resources in whatever deal they want to make. They are large enough.

• 0910

It's not the competition. As for the competition, as you heard Mr. Hambly say about the competition from Wells Fargo, they're doing the same thing outside of Canada to other countries; this is where they get their 40%. There, Wells Fargo is saying, “It's buyer beware.”

What I don't want to see happening in my Canada, in our Canada, is what has happened south of the border. We were talking about the merging that is going on there; well, they can merge for the next 50 years, but they still will not have accomplished the concentrated banking system we have here in Canada.

In Canada, by 1901, sir, the large banks had branches from coast to coast. In the United States they could never achieve that, for the simple reason that each bank has to have a state charter. So the lowest number, if they were to compete, would be one bank in each state, so they would still have 52 banks in the United States. They could never achieve the six we have achieved here in Canada.

In regard to Wells Fargo, Capital One and the others that come here, well, quite simply, if Canadians want it, it's not a service they're providing, it's capital; it's not collateral, it's capital, which they're lending out at 6% to 8%. Let me explain that to you. It's anywhere between 8% to 14%. Trust companies and banks could do that. I have a secure loan at prime plus 0.75%. I have a secure loan at prime plus 2.5%. Banks go ahead and do that over here too. It's not the size or skill they need. What they want to do is totally control the Canadian economy.

Now, as Mr. Broderick rightly stated, there were some 52 banks in Canada and now there are only 48. Even if we open the banks to foreign competition, do you think they want to come in here? No, they don't want to come in here; it's not good enough for them.

Mr. Leo Broderick: Not to Charlottetown.

Mr. Gary Pillitteri: Hey—they don't even want to come to Ontario or Toronto or anyplace, because what they want to do is just service the area from outside, with no bricks and mortar. That's all they want to do. They've been before our committee. It's not the scale of five— To me, gentlemen, they have not brought to us what you call a “proper business plan” for the reason to merge. They need the five to serve Canadians. They might want to get larger outside, but not to serve the Canadian public or the Canadian marketplace.

Let me ask you some questions—

The Vice-Chair (Mr. Nick Discepola): We don't have a lot of time.

Mr. Gary Pillitteri: —not a lot of questions, because the chairman will be upset at me.

The Vice-Chair (Mr. Nick Discepola): You've taken seven minutes, so—

Mr. Gary Pillitteri: My question is this. Do you think that these banks, by being larger—down to four—could possibly serve our businesses better? How could they possibly be better by being larger? If they are able to take on anything in the world in size— Technologically, they are the most advanced in the world.

Go ahead.

Mr. Leo Broderick: They're not going to serve Canadians better. It's clear from other areas of the world where the banks have become bigger and mergers have occurred that they have not given the kind of service to citizens that they should be giving. The evidence is in.

And I'm quite surprised, really, that we have people here actually supporting mergers when it is not in the interests of Canadian citizens and not in the interests of Canadian business. And clearly, from Atlantic Canada's perspective, the evidence is already in that banks have not been serving us well. I did make the statement that banks, over the last ten years, have become extremely greedy and have centred their activities outside of Canada. It's corporate banking they're interested in, not the needs of people in small and medium-sized businesses.

Mr. Scott MacAulay: I beg to differ. Our experience with the Royal Bank has been very positive and very community-minded. I feel the merger is going to do nothing but strengthen that community-mindedness. They're going to have more resources. They're going to maintain that community-mindedness in this community, and with more resources they're going to be able to serve us better.

• 0915

Mr. Leo Broderick: I'd like to respond to that because, you see, you ask the people in Tyne Valley, Prince Edward Island, if the Royal Bank serves them, and they'll tell you that even though the bank was making a profit in that community it abandoned the citizens of Tyne Valley.

And in the propaganda that the Royal Bank is putting out it says that it contributes $106,000 to charities in this province. Ten charities are outlined. Now, the bank has over 45,000 customers, and in terms of its contribution to charity, that's less than a dollar per citizen in this province. It amounts to only $10,000 per charity. They even go on to say that they have their staff volunteering hundreds of hours to causes. I think another problem with big corporations like banks is that they're making it a condition of employment that their employees, who are badly treated and badly paid at the moment, actually must contribute volunteer hours. That's another problem. I do not consider that to be in the interests of citizens.

I disagree totally when we portray the banks as being very community-minded and charity-minded. They're making billions in profits and this one bank gives $106,000 to charities in this province. Some would say that's even a disgrace. And let's look at their taxation. They contribute at levels which are much lower than those of many Canadians.

So I do not believe that Canadians have been treated well by their chartered banks. And some business people, of course, may support them, but if you look at the number of loan applications to banks in this country, they have been refused many times; it is a very serious problem and it's going to get worse if we have the mergers. Capital is essential for the promotion and the development of job creation in this country, and banks are abandoning their responsibilities to areas like Atlantic Canada.

The Vice-Chair (Mr. Nick Discepola): But in all fairness, I think Mr. MacAulay and Mr. Hambly are speaking about their own personal experiences.

Mr. Scott MacAulay: And that's all we can speak from.

The Vice-Chair (Mr. Nick Discepola): Right. But you were sort of generalizing too, and the statistics themselves speak volumes; the banks have done a piss-poor job of lending to small and medium-sized business throughout this country.

Mr. Leo Broderick: Absolutely.

Mr. Scott MacAulay: I'm here speaking about our own situation because that's our experience.

The Vice-Chair (Mr. Nick Discepola): You two are probably the exception to the rule—

Mr. Scott MacAulay: And, not only that, as I mentioned earlier, the Royal Bank is the single largest philanthropic organization in Canada, not just the largest bank. So—

The Vice-Chair (Mr. Nick Discepola): Mr. Hambly, please.

Mr. Wayne Hambly: Mr. Chairman, thank you. I have to agree that banks or big corporations can do a whole lot better in supporting their communities; there's no argument from me on that. However, I will say this: the stronger the bank is, the more opportunity I think we have for that bank to be able to give us the kind of support we might be looking for.

And I'd like to make one other point here. In the proposal for a merger between Royal Bank and Bank of Montreal, the chairman of the Bank of Montreal has stated that they will establish a new bank for small and medium-sized business.

The Vice-Chair (Mr. Nick Discepola): Why haven't they done it so far? That's the real question.

Mr. Wayne Hambly: I'm assuming what they're saying is that they don't have the resources to do that at this point in time.

The Vice-Chair (Mr. Nick Discepola): Mr. Szabo, please.

Mr. Paul Szabo: Thank you. It's interesting that the MacKay task force on the financial services sector, which includes much more than banks— But it looks like we want to talk about bank mergers, so maybe we'll stay there. The fact is, banks do now have the authority to sell insurance through subsidiaries. The only question is, should they be able to do their insurance business through the branch networks? That's the question to be dealt with.

Similarly, on the auto-leasing side, both sectors have told us—the brokerage insurance side as well as the auto side—have told us very bluntly that they are scared of losing a lot of jobs. That's what the industries have said to us. What I find really interesting is that I have not seen anybody come before our committee representing the employees of banks to say that the bank employees are scared of losing their jobs.

Mr. Leo Broderick: They're scared to.

Mr. Paul Szabo: I'd like to hear from the employees.

But Mr. Broderick—

Mr. Leo Broderick: You raised the issue.

Mr. Paul Szabo: No, we can expect that. I don't want to speculate.

Mr. Broderick, you start off by saying that banks often require identification.

Mr. Leo Broderick: Yes.

Mr. Paul Szabo: And we've heard that a lot.

• 0920

Mr. Leo Broderick: You don't hear that?

Mr. Paul Szabo: We do hear that a lot. Of course. This is a complex issue, but let's limit it to this: how do we deal with that?

Mr. Leo Broderick: That's a good question. I think to some extent it is needed, but my point is that if in fact they are not able to take out an account—and many do not have the resources to do so—with the bank, even if they are asked for identification— And I've stood in line and watched people being turned away even when they do have one piece of identification. They require sometimes two and three, and depending on the cheque in hand that they simply want to cash, which would also determine to some extent—

Mr. Paul Szabo: Okay. But you're describing what's happened.

Mr. Leo Broderick: Yes.

Mr. Paul Szabo: It seems to me that it's quite appropriate to require identification from you if you want to do banking at an institution.

Mr. Leo Broderick: Absolutely, but not two or three—

Mr. Paul Szabo: And it may be that the problem is not with the banks. Maybe the problem is that in Canada there are people who do not have a driver's licence, who do not have other third-party ID that's acceptable. Maybe what we have to do in Canada is establish some sort of identification—for those who want to apply for it—which can help them. That would deal with the problem. It really has nothing to do with the banks.

Mr. Leo Broderick: That's true.

Mr. Paul Szabo: I think the banks are probably being prudent in business. Any business, if it's going to extend credit, etc., or if there's a risk or a long-term relationship, really needs to know who it is they're dealing with.

Mr. Leo Broderick: You make a good point.

Mr. Paul Szabo: Now, you know the Senate committee on banking is going around and was in Halifax two days ago.

The credit union movement, which has a wonderful niche and does excellent service at the community level—which seems to be a concern—is very supportive of bank mergers. They can't wait. In fact, VanCity has announced that it wants to have the right to unite 870 credit unions into one so that they can become a bank themselves. We have life insurance companies that are deposit-takers. There is now, suddenly, a mixture of levels in the financial services sector, all of which is going to create more competition and more service in banking services outside the existing schedule A banks or first-level banks.

That's what MacKay seems to be talking about to me: we can make some changes to the financial services sector that are going to facilitate more competition right down to the local community level, that are going to provide a better level of service. He's saying that we should understand we are in a world where technology is taking over. And the stats are out: a lot of younger people out there prefer to do their banking at an electronic teller or over the Internet, and what I hear them saying is that this is happening more and more and that's the way of the future.

These changes are not for banking today. These changes are for banking for the new millennium, for the longer term, and we have to think clearly about them.

So the question, maybe for the panel generally, is this: would you agree that mergers in the financial services sector is a legitimate business strategy approach, but that the real question is, under what conditions would business combinations or mergers be permitted so that they do in fact protect—as MacKay want them to—the public interest or serve the public interest?

The MacKay report does not deal with those two applications for merger. It deals with mergers in the financial services sector as one issue and says merging is a balanced strategy. Is it a balanced strategy for the financial services sector? And should our concern maybe be focused more on under what terms and conditions combinations or mergers should be permitted?

Mr. Leo Broderick: I think it is not and should not be a viable strategy, particularly for the chartered banks in this country.

With respect to the credit unions, I do know there's talk of credit unions amalgamating to become more national in terms of being able to serve their customers and members right across the country.

• 0925

But I would caution even the credit unions: the more they become a “bank” with interests in investments all over the world, including Canada, the more they will abandon their commitment to community. And one of the criticisms coming from credit unions, at least in the United States—and to some extent I think it also can be made right here in Canada—is that the people who are operating in terms of managing credit unions are former bankers, and they come with that mentality.

The Vice-Chair (Mr. Nick Discepola): Thank you, Mr. Szabo.

Very quickly, Mr. MacAulay, please.

Mr. Scott MacAulay: Your point is well taken; I wouldn't want to assume that everyone—or even the majority—would buy into the fact that the bank merger, lock, stock and barrel, is a good idea. I think the terms and conditions under which they merge are up for negotiation, and in general, I think, the idea of a bank merger has to be a positive one.

The Vice-Chair (Mr. Nick Discepola): Thank you.

Mrs. Redman, please.

Mrs. Karen Redman (Kitchener Centre, Lib.): Thank you, Mr. Chair.

I appreciate the fact that this panel articulated—very well—several points of view.

The MacKay task force, as Mr. Szabo pointed out, deals with much more than bank mergers. One of the things that it underlines is the fact that as an entire financial sector we're asking them to be more entrepreneurial. Some of the recommendations—there are 124, and I'm assuming most of you have at least been able to read the executive summary—deal with exactly that fact: the status quo is not an option. So as much as there may be things that are or are not working in any one individual's estimation of the financial sector currently, it will look very different.

Specifically to Mr. Broderick, some things you sort of associated with bank mergers, like the ATMs, for which, internationally, Canada has the largest uptake. We seem to be in love with our bank machines. Those kinds of technological changes will happen whether or not bank mergers happen. So not unlike Mr. Szabo's question about needing identification, I guess my question to you is this: is the writing now on the wall, and will those things now happen and some branches close, regardless of mergers?

Mr. Leo Broderick: I'm not one to believe that it will happen automatically. Driving the move to automatic bank tellers and driving the move to all this Internet banking are the businesses behind the technology. We as citizens are made to believe that at some point these things are inevitable. But it's not entirely appropriate for a community to be served by automatic tellers. It's not sufficient service even if people are demanding it, which I don't think they are.

In fact, if you look at rural communities, that's the one thing they're not demanding. They want the service of a bank with real people. And we are being told that the banking industry is going through a revolution, that when we walk into banks in the future, we may never even see a person on the first floor, that it will be simply machines. And I think there's a time to say that is insufficient, that we need human beings serving human beings.

Mrs. Karen Redman: But that's outside of the merger.

Mr. Leo Broderick: It is in terms of the financial services report. It's something that we, through our Parliament, could legislate: that communities must have financial services, not just through machines. Not everybody wants to bank late at night through a banking machine. And look at the profits driving the automatic tellers. I think it's 47¢ on the dollar. Banks and shareholders can make more money off machines than by having a person deal with people. I think that's wrong.

Mrs. Karen Redman: Who are the shareholders of banks?

Mr. Leo Broderick: Shareholders tend to be ordinary people sometimes, but most shares are not held by ordinary people, in terms of the fact that most shares are not held by the majority of Canadians. They're held by very few people who hold a great number of shares, and I know we can get into the thing about pensions and all of that.

Mr. Paul Szabo: Fifty per cent of working Canadians own bank shares.

Mr. Leo Broderick: But not many.

Mrs. Karen Redman: Fifty per cent.

Mr. Paul Szabo: Fifty per cent of all working Canadians.

Mr. Leo Broderick: That's not many.

Mrs. Karen Redman: Thank you, Mr. Broderick.

Mr. Leo Broderick: Not many shares.

Mrs. Karen Redman: Was it Mr. Hyndman or Mr. Hambly who talked about Wells Fargo offering you the $100,000?

If you want that money, do we need to care, as Canadians, that they think Prince Edward Island is in Ontario, that they don't know?

Mr. Wayne Hambly: I don't think we really need to care about it at all. I certainly don't care about it. I have no intention of dealing with Wells Fargo.

• 0930

My only point was that as a local business in a small community, having a relationship with a bank that understands my business and understands our community is far more important than being sidetracked to some easy money that might come from somewhere else. That would only get you in trouble down the road.

Mrs. Karen Redman: I appreciate your point, but I guess I also look at the fact that a strong financial sector and a strong banking sector, I believe, serve all Canadians in Canada well. There are services such as payroll, I believe, and one other that banks have decided it isn't profitable to be in and have gotten out of. So they are making business decisions that in some ways steer the sovereignty of money, which I think is part of the discussion that needs to be articulated when we look at the global marketplace and international players. That's why I asked you. I don't know definitively if as a Canadian I should care about Wells Fargo coming; the reality is that they're already here.

My other question is specifically for Mr. MacAulay and Mr. Hambly. Minister Martin has made it very clear that the MacKay task force deals with mergers as to whether or not it makes financial sense to allow banks to merge. Whether or not specific banks would merge would depend on several things: there's a Liberal caucus task force, there's the competition bureau, and after that, we would have a specific series of public hearings. I'm wondering about the timing of that, because the MacKay task force will not say whether or not the Royal and the Bank of Montreal should merge or if it's a good thing. It will just say whether or not they should be allowed.

From your point of view, because you two support that as a viable business option for banks, would it be a concern for you if this timing drags on because we need community impact statements and broadly based consultation across Canada? Would it be a concern for you if this takes a very long time to come about?

Mr. Wayne Hambly: I think time is of the essence in any kind of endeavour like this, because the longer it's dragged out, the more expensive it becomes for everybody and the more diluted it gets. In terms of broadly based consultation across Canada, you folks are travelling across Canada, so is this not part of that consultation now? And I think there was a task force prior to this one that came across Canada that dealt with very much the same subject.

Mrs. Karen Redman: It didn't deal with the specific mergers. It doesn't deal with bank x joining with bank y; it deals with it in a more global sense.

Mr. Wayne Hambly: From my own personal point of view, when I talk about banks merging to be stronger, I'm not particularly supporting the merger of a Royal Bank and a Bank of Montreal. It could be the Canadian Imperial Bank of Commerce or the National Bank or any of the big six banks. What I understand and believe is that the banking industry has to become more able to compete on a global basis. This is the strategy that they have evolved and I respect that strategy because, after all, they know their business.

The Vice-Chair (Mr. Nick Discepola): Thank you, Mrs. Redman.

I'd like to thank all the guests for appearing and for giving us the benefit of their experience. Our task is not an easy one, as you know, but the Minister of Finance and the government have committed to making sure that we do what is best for Canadians. Your input is invaluable to us in making a decision. We will have a report to the minister by March and we hope that the decision will then be made rapidly.

On behalf of all my colleagues, I would like to thank you again.

I would like to suspend this for a maximum of one minute—not even enough time to make phone calls—as we prepare for our next guests.

• 0934

• 0941

The Vice-Chair (Mr. Nick Discepola): Thank you. Resuming according to Standing Order 108(2), we will now resume the study on the report of the task force on the future of the Canadian financial services sector.

[Translation]

With us today is Mr. Ulysse Robichaud, President of the Fédération des parents de l'Ile-du-Prince-Édouard. Welcome, Mr. Robichaud.

[English]

From the Insurance Brokers Association of Prince Edward Island, we have with us Mr. Jeff Cooke, president, and Mr. Dan McInnis, treasurer. From the official opposition of P.E.I., we have with us Robert Morrissey, MLA and finance critic. From the Prince Edward Island Mutual Insurance Company, we have with us Mr. Terry Shea, secretary-treasurer.

Welcome, gentlemen.

[Translation]

You have the floor, Mr. Robichaud.

Mr.Ulysse Robichaud (President, Fédération des parents de l'Ile-du-Prince-Edward): Good day. As the Chair mentioned, I'm the President of the Fédération des parents de l'Ile-du-Prince-Édouard. I'm not an expert in financial matters. We thought long and hard about coming here, but we finally decided to make a presentation to the committee because we felt it could have a substantial impact on associations across Canada, in particular parent associations. This issue concerns all francophone parents in Canada.

Our Federation represents five different regions on PEI and we are also associated with the CNPF, the Commission nationale des parents francophones.

Federations similar to ours exist across Canada. We represent minorities across the country and as such, we give the federal government considerable food for thought. The popular position in the past few years has been to say: "We must reduce the size of government and give democracy back to the people. Governments are too unwieldy and should be decentralized."

On the subject of banks, I believe that these are also part of government and the move is toward centralization or concentration. Some parties are, however, pushing for the opposite and that's one of the reasons why we decided to testify before the committee. The closure of bank branches will affect our services at various levels. They will affect employees, in particular francophone employees. It's a fact that an anglophone who loses his job has a better chance of finding another one.

Small communities will be affected by mergers. For example, in a small PEI community, the loss of one francophone employee has a major impact. That is not really the case in Quebec, even in rural areas.

[English]

I'll speak English now because I heard somebody make a comment about credit unions. In P.E.I. itself, we deal with the credit union, being a small association, and when we go to the credit union we don't have to go with all kinds of presentations before we go and speak to them. We feel that you have to go to the bigger banks with your lawyers, accountants and everything else.

Originally, the reason the credit unions were formed— And I'm sad to hear today that they're getting bigger. The movement was started here in P.E.I. There is an historic site not far from here, and maybe the committee should visit it. The Farmers Bank in Rustico is where the whole credit union movement started in P.E.I.

• 0945

In Canada, in North America, it was the Mouvement Desjardins, that saved the Rustico site, which is now recognized by the Government of Canada as an historic site. At the time, to survive, the Acadians had to start their own bank, which was the start of the credit union. Legislation had to be put into place. That's where it started, and if you look at the history of the Acadians, without credit unions none of us would be speaking French today.

I was brought up in New Brunswick. My father had the credit union in his house. People could come and talk to him and deal, because we couldn't deal with banks, even when I was born, in 1947. From then on, even in those days, being a minority, people needed credit unions to survive. Listening to people today, yes, financially, it's not an issue with small people like us.

And some people mentioned machines, but with machines it's hard to deal with minorities. That's another reason we're very scared of this. We don't want to deal with machines. We want to deal with people. The fear of machines is this: you press 1 or 2 and hear, “Do you want service in French or English?” Well, we speak French, but Acadian French, and it's hard for us to use a machine. Nothing is translated, so whenever we have problems in our education, for example, and we go and meet with the credit union, we can express the problems we're having because we get subsidized by the federal government.

Sometimes we don't get our cheques in time. Sometimes we don't have any money to pay our employees. If we go to the credit union, they'll give us financial backing. They'll let us survive. They'll give us money because they know us. They know we're in the community. But with a big organization like the Royal Bank—or any of the big banks—we don't feel comfortable.

It's like a domino effect, and we feel that this is another domino effect; like I said in French, we want to decentralize the federal government and all governments to give power back to the people, yet we want to centralize our banks? I think there's a conflict there.

Even coming here today is not comfortable for me, because this is big business here. If I were giving this presentation to my own community, it'd be a lot easier to deal with. That's why we did not prepare all kinds of text. I came here to let you know that when I go to a small bank, I go there without all these documents at first, to discuss things, and so I don't try to express the opinion of—

[Translation]

I have been associated for many years with volunteer organizations such as school boards and parent federations. I've worked for many years at the grassroots level. One of the problems we have here in Canada is that we want to imitate the Americans. Here in the Maritimes, and especially as far as Acadians are concerned, bank mergers would be a mistake. This move would result in a number of spinoff effects, as a mentioned earlier. I am truly dismayed to testify today and to hear that even the credit unions are pleased about the banks' merger and expansion plans. The situation is even more critical than I thought. I'm truly dismayed.

In years past, members of our Acadian communities managed credit unions and were considered important members of the community. They came from small communities and were treated as equals. If expansion becomes a reality, we could be left with only a single representative on certain boards. Bank mergers will do away with the human element. I realize that I don't have a solution to the problem, but I think it's important for small organizations like ours to voice their opinion. Thank you for giving us the opportunity to do just that.

[English]

I know that we don't have any magic solution; we're small, but we represent identical groups all across Canada. I know that if you go to Manitoba you'll find a fédération des parents there, and they deal with a credit union, and it's the same if you go to B.C. or to Nova Scotia. We're not big, but we represent communities and we represent culture.

And we all have the same problem.

Naturally, we don't have a big say because, as I said, we're all in our little spaces. We're divided all across Canada so we just speak in our own little communities and we don't have the impact of big banks or big—

• 0950

But I'm glad that you gave me the chance to come and express my opinion. We are not in favour because of those reasons. If I were in the majority, maybe I would see this thing differently, but having lived all my life in a minority, fighting for survival, we think this will make it a lot harder for us to survive in the future.

I thank you for your time.

[Translation]

The Vice-Chair (Mr. Nick Discepola): Thank you, Mr. Robichaud. Remember you can always send us something in writing if you prefer.

Mr. Ulysse Robichaud: Maybe we'll do that. As I said earlier, I almost didn't come to this meeting. I finally decided to put in an appearance to let you know what we, as a minority, feel and to share with you our views about the implications of bank mergers.

We mustn't only look to the future. We must also look to the past if we want to survive. Everything is interconnected. If the Acadian community disappears, if minorities disappear— it's the same thing in nature. Endangered species must be protected.

The Vice-Chair (Mr. Nick Discepola): We can sympathize with your position because we too are a minority in the province of Quebec.

Mr. Ulysse Robichaud: Each time a merger takes place, minorities feel the impact more than the majority ever does. It's not because we are any less important, it's just that when we lose our small banks and our credit unions, we must go to the city to do our banking. The city is a large English-speaking centre and service in French is only available through the push of a button. It's not the same as dealing with someone in person at a small credit union.

The Vice-Chair (Mr. Nick Discepola): Nevertheless, our offer stands and please feel free to take us up on it.

Mr. Ulysse Robichaud: Thank you very much.

[English]

The Vice-Chair (Mr. Nick Discepola): I'd like to go now to the Insurance Brokers Association of Prince Edward Island, with Mr. Jeff Cooke and Mr. Dan McInnis.

Who will be presenting? Mr. Cooke?

Welcome.

Mr. Jeff Cooke (President, Insurance Brokers Association of Prince Edward Island): Thank you, Mr. Chairman and committee members, for giving us the opportunity to present our views on this critical industry-related issue.

I'm president of the Insurance Brokers Association of Prince Edward Island. With me this morning is Dan McInnis, who is also part of our association executive.

We believe it is wrong that the task force on the future of the Canadian financial services sector has focused almost exclusively on the interests of only one segment of the financial services sector, namely, the banks.

If their assessment of the financial services sector had been adequate, it would have taken into account the critical features of the property and casualty sector, including its competitiveness, its socio-economic contribution, its distribution system, and its regulatory framework, which includes the licensing of brokers and their professional accreditation programs.

Had these issues been properly addressed, we believe the task force recommendations would have been vastly different. The task force did not see the importance of these issues because it failed to grasp the distinct nature of the P and C insurance. It is a much different product, requiring careful risk investigation and management. Unlike all of the financial instruments with which banks are familiar, P and C insurance does not produce a direct financial return to the policyholder. You cannot borrow against P and C insurance and in no sense is it an investment.

We're taking time to make these points, not only because the task force missed them, but because it disregarded them in its recommendations. Our industry is distinct and thus requires unique rules, a fact that is widely recognized in all other foreign jurisdictions. This leads us to conclude the task force did not take the time to understand our industry.

Are we a unique industry? In 1995, the federal Superintendent of Financial Institutions virtually predicted the task force mistake of 1998 when he said:

Since joining the public sector seven months ago, I have been struck by the lack of real understanding of the property and casualty industry and the tendency to lump it together with other industries in the financial sector. I am afraid this is the root of some of the policy decisions in the past and is likely to be a factor looking forward as well.

Mr. Chairman, we look to you and your committee colleagues to right MacKay's wrong.

• 0955

In looking at the report, and in considering the thrust of the bank insurance recommendations, we have to remember that neither we nor consumers nor small business asked for it.

We believe that the reason consumers and small businesses have not come forward to support the task force report is that, unlike the banking industry in this country, the P and C sector is highly competitive and consumers know it, whereas only a handful of banks operate in Atlantic Canada, and if they have their way, there'll be even fewer. There are more than 3,000 independent insurance brokers in our region who work in about 1,400 small businesses. They source the best and the most cost-effective insurance for their consumers from over 200 regional, national and multinational insurance companies.

We believe that the failure of the task force to acknowledge that Canadians already enjoy the benefits of one of the most solid, competitive and cost-effective P and C sectors in the world is not only shocking, but represents a major weakness in the report. Failure to look at these competitive factors calls into question the basis for all of the report's recommendations that deal with the competitiveness in the P and C sector.

In 1992, changes to the law, which gave banks the right to compete in the insurance industry, really did enhance competition. And if, at the end of the day, some of us did not respond to the changed environment, then we would have lost in a fair fight. But it is clear now that 1992 changes aren't enough for the banks. They want the rules changed so that they do disadvantage us. And so, at their urging, MacKay recommended that the banks be given even more special privileges.

If this recommendation becomes law, we believe the ultimate impact will be that just as there are a handful of places for a consumer to get general banking services today, tomorrow there will only be a handful of places where consumers can get P and C insurance.

We believe that the MacKay recommendations do not serve the public interest, for two reasons: one, they ultimately lead to less choice for consumers, and when there are fewer choices there will be higher prices; and two, the 600 or so brokerage offices in the many small towns in Atlantic Canada will begin to disappear. These small businesses are very important to the communities. They employ more people from the local community and use more goods and services from the local community than a bank branch would if it took over the community's insurance business.

If the banks are given special privileges, competition in the P and C industry will shrink, employment in small communities will decrease, the tax base in small communities will erode, and consumers will be left with less choice. And it will have been government policy, not globalization, which will have it made so.

The Liberal government has said in many places in its policy books that the interests of small business are a priority, and politicians of all stripes tell us that small business is the backbone of our great country. So the government must understand that this report is bad for small business. The effect of it will be to reduce the opportunities for capital formation in small communities. It will harm a stable, professionally run industry. And it serves no pressing public need.

The MacKay report is not about creating business; it's about taking away established business. The MacKay report is not about enhancing competition; it's about eliminating competition. The MacKay report is not about creating new jobs; it is about eliminating established year-round full-time jobs, which in this region are hard to come by. The MacKay report is not about satisfying the needs of consumers; it's about satisfying the hunger of powerful financial institutions to increase their profits so they can have—or they can claim to have—more international clout.

I thank you.

The Vice-Chair (Mr. Nick Discepola): Thank you very much, Mr. Cooke.

Now I'd like to turn to Mr. Shea, secretary-treasurer of the Prince Edward Island Mutual Insurance Company.

Mr. Terry Shea (Secretary-Treasurer, Prince Edward Island Mutual Insurance Company): The P.E.I. Mutual Insurance Company is a local mutual company that is licensed to sell insurance here in Prince Edward Island. The background of our company is included in my written submission.

• 1000

I'm not going to read that whole submission. I'll just be touching on some of the points that have been included in that submission. It'll be there for you to read at a later time, or maybe you've already read it.

In our opinion, the report is a well-written document with a number of good recommendations. The one recommendation that we object to, in which we are going to be following the lead of Jeff Cooke, is recommendation 18, which deals with the task force recommending that banks be permitted the power to retail insurance in their branches and use customer information files from which to target their present customer base for their insurance business.

We would like the current insurance retailing powers and restrictions applied to the banks in the 1992 legislation to be maintained. Should banks retail insurance in their branches, consumers will feel an implied pressure to respond positively to offers of insurance products made by the banker. This perception that the consumers will have will be that they'll have to support the bank's products when seeking credit. This is unfair competition and will lead to a playing field for the insurance product that is not “level”.

Many consumers, in our opinion, will end up paying higher prices if they try to benefit from one-stop shopping as opposed to looking around to find more suitable competitively-priced products. It's our opinion that the banks will price insurance products at a loss until they have gained market share, and then up the prices will go.

Since 1990, the banks have, for all intents and purposes, taken over the securities and trust sectors. We don't want this to extend to the insurance sector.

Banks will use their current customer information files to better target consumers. This is information that they've obtained for purposes different from those for insurance, and we see that as a very unfair competitive advantage that the banks would have if they were permitted to use this information.

The task force reports that lower- and middle-income Canadians will be the principal beneficiaries of having this increased competition. We disagree with that assumption. Our feeling is that banks will use their current customer information to select a niche market of better-than-average insurance customers who have better quality properties and better past claim records. The less desirable risks and other people out there will be left with no place to purchase their insurance because the banks won't be targeting those groups of people. We, as a small mutual company, have always been and will continue to be a fair player in the marketing of the insurance product.

More than 85% of the deposit-taking services market is currently in the hands of the five largest banks. Please don't let the banking industry have the insurance market as well.

The task force reports that increased competition will bring about a better marketplace. In our opinion, the marketplace for insurance is at an all-time competitive high right now. Increased competition will result in job losses among the existing players in the insurance industry. The objective of almost every insurance company out there is to increase market share. At any conference I've attended within the last year, CEOs of insurance companies speak, and the first thing they say is, “We're going to increase our market share”.

In our opinion, there's only so much market out there, and if they're going to increase their market share, somebody's going to lose.

In 1998, consumers are getting great value for their insurance dollar. Most insurance companies out there operating right now are operating at an underwriting loss; their bottom line will be an income because of investment income on investments that they've accumulated in the past whenever the insurance market was a profit-making business.

Increased competition will result in job losses where we least want to see them—in small communities where small insurance companies and brokerage offices will be forced to close. New jobs will be in larger urban centres where the national banks are.

Should the banks obtain the insurance retailing powers they seek, the various Canadian companies, including the farm mutual insurance companies, which originally developed the Canadian market, would be the first Canadian casualties of this new insurance environment.

I don't want to appear to be bank-bashing here today, because that's not what I'm doing. Banks do serve us well now; we just don't want them to have more power. With that, we ask that recommendation 18 be stricken.

• 1005

I thank you very much for allowing me to appear here today to state our opinion.

The Vice-Chair (Mr. Nick Discepola): Thank you very much, Mr. Shea.

To conclude the presentations, I'd like to ask Mr. Morrissey from the official opposition to make his presentation, please.

Mr. Robert Morrissey (Opposition House Leader, Legislative Assembly of Prince Edward Island): Thank you.

The Vice-Chair (Mr. Nick Discepola): Welcome back.

Mr. Robert Morrissey: Thank you again for giving me the opportunity to offer the views of the official opposition of P.E.I. on this very important national issue. On that note, I do hope you're enjoying your stay here in P.E.I. and that you've had the opportunity to spend some money yesterday and last night while you were here.

Some hon. members: Oh, oh.

Mr. Robert Morrissey: Mr. Chairman, I know the role of this committee is to examine the recent report and the future of our financial institutions. However, I don't think you will be terribly surprised if I deal almost exclusively with the issue of potential bank mergers and the impact this might have on places like P.E.I.

As of course you already know, the issue of bank mergers is extremely complex. I believe that advocates on both sides are completely sincere and knowledgeable. Beyond the intricacy of the global marketplace and the competitive forces unleashed by the constant shift of the world's economies, the issue of bank mergers is fully embedded in needs, concerns, and aspirations of every Canadian citizen. In my opinion, your analysis of the national banking industry must begin and conclude in the kitchens and living rooms of Canadians.

Mr. Chair, my home community is Tignish and area. Tignish is a small town in the western part of Prince Edward Island. Not long ago, the Canadian Imperial Bank of Commerce shut down its branch in Tignish and roughly half a dozen Islanders lost their jobs. These were good jobs, Mr. Chair, and the people who worked at the bank were recognized members of the community, my community. They played an important role in that community. And both they and their institution were one of the stable anchors around which my community revolved and evolved over the years.

Now, I have a certain tolerance for the public relations ploys which suggest that tools like the Internet or the fax machine or an increase in television channels—all these marvels of the modern age—are making the world a smaller place, but my tolerance for public relations is tempered by realism.

All the pamphlets and the commercials in the world will not persuade me that the Internet is a replacement for the human contact and sympathy that human beings bring to complex relations—I still do not use a banking machine—any more than I believe that an enormous financial bureaucracy on Bay Street is any substitute for the first-name relationship that people of Tignish, my community, once had with their local bank manager and the clerks in that bank who served me and the community very well.

Mr. Chair, I expect your committee will have another opportunity to question Mr. Cleghorn or Matthew Barrett. If you haven't done so already, I would like you to put a question to them. Ask them how their institutions became so successful in the first place. The only honest answer to that question is that the strength of Canada's banks—and they have served us well—is a direct result of our success as a society, and therefore, the banks owe more to the quiet Canadians who contribute so much than they do to the faceless managers and the financial gnomes who populate the world's finance markets.

Now I'll tell you, Mr. Chair, a lot of those quiet Canadians don't have a lot of perceived financial clout when it comes to negotiating, not when you compare them to the Peter Pocklingtons or Nelson Skalbanias of the world, who are attempting to correct their financial misfortunes.

But I'll tell you what many of them do have, Mr. Chair. They have the respect of their community because they often employ three or four people. They have a business that makes a real contribution, to both their immediate and collective communities. And they don't ask for much—just respect and understanding, which I guess which you would share. In discussion with you yesterday, you indicated some small community and business background. So you understand this.

These people, as you are aware, Mr. Chair, are not always treated the same as the Pocklingtons and Skalbanias. The truly small business often faces higher service charges. They cope with at times higher interest rates for their loans. And in the statistical analysis, they are turned down more often for loans than larger corporations.

• 1010

These quiet Canadians are everywhere. The employees of those small operators and businesses represent close to 80% of the national business population. These are statistics I'm sure you're well aware of.

In our small communities, here in Prince Edward Island, what will those small business people do if they continue to lose their local banks? How will they be able to persuade a stranger over the telephone that a good idea will work in Tignish, Tyne Valley or Souris if the person at the other end of the line has never been father east than Toronto? Where would the small retailer go if she runs out of change? Is it going to mean a constant trip to a larger population centre? What about night deposits? What about the stability of afforded by good jobs in local areas?

As you are well aware, Mr. Chairman, Doug Peters estimated in a recent study that up to 40,000 jobs could be lost if the mergers go ahead. For our labour force in Prince Edward Island, imagine it; our total labour force is 65,000, and one number shows that 40,000 across the country could be lost, almost equivalent to the total labour force in Prince Edward Island. So it's easy for us to understand the impact that bank mergers will have on jobs across this country.

But, Mr. Chair, even if Mr. Peters is wrong and even if the merger of the Royal and the Bank of Montreal only cost 8,400 jobs, as Mr. Cleghorn has stated, even at this low end of the scale, would you not agree that the cost is too high to contemplate?

Mr. Chair, just because something is big doesn't mean it's right. Just because an initiative appears tempting doesn't mean it will work. In some ways, I understand the desire of Canada's banks to embrace some type of change. Canadians have collectively made our banks extremely successful institutions, and I want to be clear about this, the banking industry in Canada has served Canadians well. I do not recall an incident where the taxpayers as a whole had to bail out any of our banks, as has happened in other jurisdictions. So with the legislation protecting them, the institutions have served us and themselves well because, really, the banks are made up of many Canadians as investors.

But our financial industry, at least in some quarters, appears to be following a syllogism that doesn't necessarily stand the test of logic. The bankers seem to believe the following: (a) we must do something to become even more successful, (b) mergers are something, (c) therefore, we must merge.

Mr. Chair, as a committee I think you have a role to change (a), the first option. There are ways to ensure that our financial sector remains not only stable but successful as well. I do not believe that mergers are the route toward this continued stability and success, because my view does begin and conclude in the kitchens and sitting rooms of Canadians, of Islanders. And if this industry neglects those needs, then the entire concept could be doomed to failure.

Mr. Chair, this is a very important issue you are dealing with today because it will have significant impacts. I chose to simply look at it from a job perspective in rural Prince Edward Island, small-town Prince Edward Island, and you can multiply that throughout small-town Canada.

You've heard the views of other financial institutions and of the insurance industry as well. A lot that comes from job loss: we cannot continue to erode the base of small-town Canada and continue to thrive as a society and thrive and grow as a nation. We have to be extremely concerned and recognize that there is global change confronting us, as we discussed yesterday.

But what is the best option? It is very difficult to convince small-town Canadians, especially small-town business people, that mergers will not lead to bank branch closures and the loss of jobs in their communities.

With that, Mr. Chair, I thank you for the opportunity to present our views. And once again, thank you for coming to Prince Edward Island to allow those of us here to present our views on these important issues confronting you.

The Vice-Chair (Mr. Nick Discepola): Thank you, Mr. Morrissey.

Colleagues, we have about 45 minutes. Therefore, I will go with 10-minute rounds.

We will start with Mr. Ritz, please.

Mr. Gerry Ritz: Thank you, Mr. Chairman.

Thank you, gentlemen, for your presentations here today.

Mr. Shea, in giving your last point you said “should the banks obtain the insurance retailing powers they sink”. Was that a faux pas or a subliminal message?

• 1015

Voices: Oh, oh.

Mr. Gerry Ritz: To Mr. Shea and Mr. Cooke, banks are already selling insurance. We've heard that from a number of people. If they continue doing that through stand-alone storefronts, is that acceptable?

Mr. Terry Shea: In our opinion it's acceptable because it's a level playing field; they can't use their current customer information files to target customers. They have to sell the insurance in the same way that we insurance companies have to sell insurance. There are all kinds of mediums out there now for purchasing insurance and that also is making the market more competitive. There is direct selling, which banks are very deeply into. There is Internet selling, and again, the banks are deeply into that. They have the network and they have the computerization to be able to do that, so they're forcing us, as companies, to keep up to them now. That's there.

But it's not fair if they're allowed to sell insurance in their branches, because, as I said in my report, the consumer will feel an implied pressure. Let's say I'm a consumer getting a loan and the person sitting next to me says, “And your insurance? Would you like to purchase it here?” If I feel I need that loan, for whatever purpose, I'm not apt to say no. I'm apt to say okay, and in that situation, I'm not even going to check the competition out to see what the pricing is. So the consumers aren't going to pay less, as the report states.

Mr. Jeff Cooke: I'd just like to add a bit to that, if I may.

Mr. Gerry Ritz: Sure.

Mr. Jeff Cooke: As you know, the CIBC insurance or, as it's known, I guess, their “personal insurance”— I agree completely with Mr. Shea. One of the things we have to look a lot deeper at is getting market share. Given that you're driven on the stock market and you have shareholders you have to make returns to, you sometimes tend to do things that may not be in the best interests of all Canadians.

Currently, as an example, from what I read in the MacKay report, if I were setting up a body governing the tied selling and the banks said no, we can sell it on our own, but we'll be regulated— The problem with that, I don't need to tell you, is that banks have unlimited resources, and if small communities and brokers and insurance companies do not have the same bottomless pit to use to fight legislation in court, while that whole thing is going on we're still continuing to lose market share and they keep getting larger.

I don't mind competition. Actually, I welcome it because it gets us all more competitive, more streamlined in shaving costs. If you look back over the last five to ten years and look at what even your own current premiums are today—Ontario is a good example of how they've changed over the last five years—I think you will see that competition works very well. In Canada, there are 230 insurance companies, but not one insurance company represents more than 10% to 15% market share.

When you look at that and then look at what the banks have in market share, especially if a couple of banks merge, you're going to have one bank controlling 75%. That becomes a little scary. So certainly, CIBC has gone out and has its own company, and Royal Bank has its own now. Other banks also have their banks in the show.

So yes, banks, go ahead, start your own companies. If they want, they can probably buy Canadian companies, which I'm surprised they haven't done, because a lot of them are for sale. If you really want to get into it, go buy an insurance company, and if you think about it, they already have a broker network that could actually sell the products for you and you'd be in areas and small communities that the banks don't want to put their assets in. And a lot of them, as Mr. Morrissey said, have closed. So I'm a little bit confused about their final objective, because I would think that the distribution the brokers could offer them would be more far-reaching than going the other route.

Mr. Gerry Ritz: To continue on that line, would it be fair game, then, for a bank to have a leaflet on the counter with a 1-800 number or the address of their insurance branch or is that taking it over the line?

Mr. Jeff Cooke: I consider it taking it over the line because the banks— And I'm not bank-bashing when I say this. I know the people at my bank very well and I think they're very nice, very great people.

But when it comes down from the corporate office that doesn't always necessarily mean that they want to do it regionally—but they don't have a choice. So there's a problem you get into.

• 1020

I'll use this example. In Belgium—I don't know if you're aware of this—the financial institutions used to scan the cheques consumers wrote for insurance premiums and then send letters to these same consumers saying they could beat the price. That's true. Now certainly they were in trouble for it and they stopped.

But how much time and energy do we have to spend? We don't have the same resources. And let me tell you, if we try to take the Canadian banks to court, we wouldn't have the money to fight and then we'd be tied up forever in committees and courts. By the time it's all said and done, the business has already gone, businesses are already closed and some companies have closed their doors.

Mr. Gerry Ritz: How do we, as legislators, put regulations in place so that those lists don't get leaked to the branch down the street? How do you safeguard that? You've given us the Belgium example.

Mr. Jeff Cooke: The current legislation set in 1992—not that I was even in favour of that—has proven to be good, because in Ontario specifically they've forced the hand and premiums have changed and have been brought down. Ontario did face what you'd call substantial premiums, and they've come down.

The current legislation there means they have to operate outside. They're not allowed to cross-sell. So when the consumer leaves the bank, he has the choice of going up the street to the CIBC personal office or to Mr. McInnis' office. But at least the consumer is not feeling that he must purchase this insurance.

And this is more important for the first-time home buyer or the first-time car buyer, because they're sitting there already sweating over their mortgage being approved and they're going to believe that they have to sign in order to get it; it's all tied into the mortgage all neat and tidy.

I don't believe there should be any connection within their specific office.

Mr. Gerry Ritz: Okay. Thank you.

The Vice-Chair (Mr. Nick Discepola): Did you answer Mr. Ritz's question, though? What is wrong with handing out a flyer that says to call 1-800 if you want a particular loan or a particular service or a particular mortgage?

Mr. Jeff Cooke: My concern would be the implied impact, and in their case, saying, “Can I drop my brochures off there as well?” All they're doing is—

The Vice-Chair (Mr. Nick Discepola): But I understand from your industry that one of the key concerns is coercive tied selling. If I'm simply given a flyer, the chances of coercion are much reduced by using the telephone as opposed to being face to face. What would be your industry's objection to just allowing the banks to have a flyer or a brochure on their counters advertising the service?

Mr. Dan McInnis (Treasurer, Insurance Brokers Association of Prince Edward Island): One of our concerns was that we would consider the very fact that people coming into the branch would get that information; they're not there to buy insurance specifically, so they're being referred to an insurance company. We go out and spend money on marketing, developing—

The Vice-Chair (Mr. Nick Discepola): Is it unfair competition to allow the banks to do that? They're spending money. They also have an infrastructure. There is consumer education.

Mr. Dan McInnis: We don't believe it's fair if they're doing that in a bank branch. If they're outside doing their marketing, promoting and selling of an insurance company, that's fine. That's a level playing field. But I'm thinking of somebody coming in to take a mortgage and then being referred to insurance— It's—

The Vice-Chair (Mr. Nick Discepola): It's a fine line.

Mr. Dan McInnis: It's a fine line, but it's effectively almost the same as having someone in your branch selling insurance.

Mr. Gerry Ritz: I would have the bank insurance and then you guys listed underneath it and all that and it would be okay. Then the customer can make a choice.

Did you have a comment to make, Mr. Cooke?

Mr. Jeff Cooke: No, it's okay.

The Vice-Chair (Mr. Nick Discepola): Continue, please, Mr. Ritz.

Mr. Gerry Ritz: To shift gears for a second, Mr. Morrissey, you were quoting studies showing massive job losses and branch closures. Of course we've all heard that. You also talked about your own branch at home, a CIBC branch, closing. Are there any studies to show—or in your own personal experience—are bank customers leaving because of that? Did you not deal with CIBC somewhere else because CIBC let you down at home? Or did you just take your account and go to another CIBC branch? Are there studies that show there will be a lot of customers—

Mr. Robert Morrissey: Oh, there was customer loss. I know there were customers lost in that case, like one small business that I'm involved in, because it was inconvenient to drive constantly to Alberton for deposits.

Mr. Gerry Ritz: Right.

Mr. Robert Morrissey: It became that particular issue. As we discussed, there are not enough hours in the week now for most small business operators to pay for it. In my case, I stayed with the CIBC. There were a number of factors. My credit card was a Visa credit card and it was convenient for me to continue to operate.

Mr. Gerry Ritz: But you can have credit cards from banks other than that one to deal with.

• 1025

Mr. Robert Morrissey: As I indicated, the banks have served the country well. When I look at the current situation in Japan, I see that a lot of their financial instability has come from their banking institutions. That has not occurred in Canada that I'm aware of. Job loss is one thing that concerns me, not only as a politician but as a resident of the community. I've seen firsthand what happens.

As somebody indicated, I dealt with that decision. I know it wasn't made locally. Those people serve and do it well.

Of course, seniors left the bank. In this case, the local credit union was the net benefactor. I have trouble understanding the logic. They gave the building to the community. They didn't recover any cost there because the resale value of the property was such that it would have been worthless. It was on the market for a while, and then it wasn't sold. It was a new bank branch. It was only about 10 or 15 years old. I don't understand the logic behind it. They had to curtail hours or even reduce the number of employees. A couple of employees were transferred to Alberton.

I guess, having the option, any service would have been better than the service I get now, which is zero. That's happening all across the country. I think the biggest opposition would come when people hear about bank mergers. The banks have already been downsizing. It has been going on. There have been branches closing all across the country in small communities. I think you'll see a further acceleration of that.

The Vice-Chair (Mr. Nick Discepola): I'm curious, though. Your community did have an alternative through a cooperative movement.

Mr. Robert Morrissey: Yes.

The Vice-Chair (Mr. Nick Discepola): Yet you still chose not to do business with that company.

Mr. Robert Morrissey: Oh, no, I do business with the credit union.

The Vice-Chair (Mr. Nick Discepola): Do you?

Mr. Robert Morrissey: Yes.

The Vice-Chair (Mr. Nick Discepola): Did they really pick up the slack in terms of full-service coverage?

Mr. Robert Morrissey: Yes, they increased it. Because their annual meetings are public, I saw that the local credit union's business had increased. They hired a number of new people.

The credit union was quite strong here to begin with. My community has a strong cooperative background to it. The credit union was larger than the local bank in that case.

But there are other communities that do not have that option. I believe the only financial institution in Tyne Valley was the Royal Bank. When it pulled out, they had no option, so the credit union in a neighbouring community opened the branch in that particular community. So I take it that, in that case, the bank would have lost a significant number of its clients in that community.

The Vice-Chair (Mr. Nick Discepola): Thank you. Mr. Ritz.

Mr. Gerry Ritz: But in the credit union picking up the slack and hiring a couple more people, there was no net job loss.

Mr. Robert Morrissey: Yes, there was, because more than two people worked at the local bank.

Mr. Gerry Ritz: Okay. You said a couple got transferred to the CIBC in the neighbouring town and some more were hired by the credit union.

Mr. Robert Morrissey: Initially, but those have been reduced.

Mr. Gerry Ritz: Okay.

Mr. Robert Morrissey: I think it was part of assimilating the files from one to the other, because that's not the case.

Mr. Gerry Ritz: Thank you.

The Vice-Chair (Mr. Nick Discepola): Mrs. Redman.

Mrs. Karen Redman: Thank you, Mr. Chair.

One of the important recommendations of the MacKay task force report is on greater access to the payment system by insurance companies, investment dealers, and mutual fund companies. These powers would allow institutions to better compete with large banks. In addition, it's recommended that the Interac system be expanded, allowing consumers to make deposits at any ATM, even those that aren't owned by their financial institutions.

My question really is, what would that mean to the insurance companies? Who do you think should establish the fees? Should the CPA members decide what to charge to new members? How can we ensure that the fee structure is not another barrier to financial institutions?

Mr. Jeff Cooke: In the MacKay report—this is where it goes back to a lot of the basis on it—there's life insurance and P and C insurance. Now, life insurance is a separate issue, but the P and C industry goes back to the very fundamentals of the brokerage in that they're in every community. People who come to see us come to our office and pay us.

As a broker, I don't see a huge issue about a consumer wanting to pay their insurance at their ATM. In today's world, there's everything from pre-authorized chequing to taking a credit card over the phone. People, especially in rural communities, just want to pay cash. They have no such need for an ATM. Actually, farmers don't even want an ATM. They want to come in and see you and pay their insurance.

• 1030

As far as the regional, small communities are concerned, I don't see the ATM being an issue that we're really concerned with. There may be some other issues from your large centres, maybe Toronto, because it's such a large area, but I think that point is probably more directed towards the life insurance companies and their wanting to be able to access the ATMs, because with life insurance, you'd be buying from, I don't know, Transamerica or somewhere, and that could be down in California, not coming in to pay your local broker.

So I'm not really sure of his direction on that. Was it focused at both or just the life side?

Mr. Terry Shea: As a mutual company, we like the recommendation that the doors of the Canadian payment system be opened. As a member of a greater group, our trade and industry association, the Canadian Association of Mutual Insurance Companies, we think down the road we as a group of mutuals might be able to benefit from that.

Mrs. Karen Redman: Who do you think should set the rates? Are there safeguards that need to be in place?

Mr. Terry Shea: Yes, I think there are safeguards that should be in place, and I think the rates should be set by the payment system organization itself.

Mrs. Karen Redman: I don't know if anybody else wants to comment on that.

The Vice-Chair (Mr. Nick Discepola): I guess not.

Mr. Szabo, please.

Mr. Paul Szabo: I really find this whole thing fascinating. When you get down to it, people who are opposed to bank mergers tend to be suggesting or thinking along the lines that banks are regulated agencies that have to work not for profit, that they should be— In the previous panel somebody said they have to be legislated to loan more to small businesses, or they have to invest in the community, or they have to do this and they have to do that.

I wonder whether the panel has any attitude towards what a Canadian bank is. Are they really a business, and should they be allowed to be as competitive and as good and as profitable as they should be? Or are they not really a public business that has to have controls on them as to what they do as far as making their business as successful as they want to be?

Mr. Robert Morrissey: I'd like to comment on that.

I don't believe in legislating them to do particular things. There are examples from the U.S., and most recently it's the Japanese example. As I indicated in my comment, the banking industry has served Canada well globally over the past years. There hasn't been much change in the banking industry in years and years. Our five large banks have been there for some time, and they've evolved to where they are today.

Profitable? You have to look at who the profit goes to. It's easy sometimes to identify the banks as moving offshore, but look at who the shareholder is. The pensions of a lot of people, so-called “ordinary Canadians”, are held within bank stocks simply because they have been quite profitable over the years and they've achieved the biggest growth. You cannot have it both ways. In fact, probably even some of the presenters may look at where their pension funds are invested.

Mr. Paul Szabo: How is that different from another business, another public business?

Mr. Robert Morrissey: As I indicated, they should be profitable. Obviously they have to be profitable if you're going to serve the institution well—

Mr. Paul Szabo: I'm trying to understand your answer. As far as you're concerned, for example, the Royal Bank is really no different from General Motors.

Mr. Robert Morrissey: It is somewhat different, because General Motors does not have the protection that the banks have through Canadian legislation. When you compare to a business like that, they have to go and sell their car if it's good and find somebody to buy it; if it's crappy, nobody will buy it.

Mr. Paul Szabo: What protection are you referring to?

Mr. Robert Morrissey: I don't have the specific legislation here, but the banks operate under a charter in Canada, and there's separate legislation. You and I cannot start a bank tomorrow.

Mr. Paul Szabo: Sure, you could.

Mr. Robert Morrissey: Not at the same level that the five chartered banks operate at within the country.

Mr. Paul Szabo: I'm still trying to understand what you believe are the protections banks have.

Mr. Robert Morrissey: Well, in the framework in which they operate within the country—

Mr. Paul Szabo: Those are conditions, not protections. You said “protections”.

Mr. Robert Morrissey: Okay, maybe I used the wrong term.

Mr. Paul Szabo: Does anybody else have a vision of the banks?

• 1035

The Vice-Chair (Mr. Nick Discepola): Do you want to chair the meeting?

Mr. Paul Szabo: I want to give them a chance, because my time is limited here.

Mr. Ulysse Robichaud: Again, not big business, but at the very grassroots level our survival as Acadians was the church, the banks, and the school. That's why the credit union movement was formed—not to create big profits for banks, but they created their own banks to be able to survive, to be able to be served in their own language, because they couldn't understand English. So the bank means more to us than just profit. It's part of the community.

Mr. Paul Szabo: Are they different from a corporation?

Mr. Ulysse Robichaud: They are different to us, because in the credit union, the caisse populaire—maybe the credit union is a little bit different, but they're supposed to be based on the same— They are different. Even the insurance company— in Moncton, the Assomption was formed.

When we had the credit union in our house, my father sold insurance as well for Assomption. So it was kind of a combination in those days, although they came from two different things.

It's hard for me to make you understand, because coming from a different background— Maybe I didn't understand your question.

Mr. Paul Szabo: The question was, are banks any different from any other public corporation in terms of the latitude they have to make their business as successful as they want to be?

Mr. Ulysse Robichaud: Maybe I'm not qualified to answer that. I feel they are. Not from a business point of view, but from a community point of view I find that they are different.

Mr. Terry Shea: In my opinion, and in our opinion, banks are different, because we feel they have been allowed to grow and be profitable over the last number of years in a protected environment. The specific protection I'm dealing with right now is the protection from having foreign banks enter the Canadian banking system.

Our Canadian banks were protected in that area because of the stringent rules surrounding foreign banks entering Canada.

Mr. Paul Szabo: Good for you. Somebody understands.

Mr. Terry Shea: I think they should be regulated, but I don't think they should be regulated to death. There are owners of banks. We as a company are shareholders. We have a lot of common stock in a variety of different banks, and we're very happy whenever we sell our stocks. So there's a fine line there. I think they do have a lot of authority now and I think giving them more power is dangerous.

The Vice-Chair (Mr. Nick Discepola): Would anybody else like to add something?

Mr. Jeff Cooke: I'll just follow up on exactly what Mr. Shea was saying, because that's what I was going to say.

There's no question that the current legislation restricts foreign banks from competing on the same field. Yes, there's a Wells Fargo Bank and an ING Bank that do specific functions, but they're not given the same latitude or the same rights as the Canadian banks.

If we want to go that route— and I'm not going to sit here today and discuss whether foreign banks should have the full banking privileges as the current banks, because my concern is that then Canadians will get into the same issues they did in the U.S. in the S and L issues, and we don't want to go down that road.

Canadians are fortunate to have strong, stable banks. What they do, they do very well. The problem is when they start expanding outside of that; that's when trouble happens.

Correct me if I'm wrong, but in the 1980s was it not the Canadian taxpayer who came to the rescue of a couple of the Canadian banks, which, due to their heavy investment elsewhere, had a huge foreign debt? I believe CIBC comes to mind. It wasn't the bank that said, I'm going to go bankrupt; it was the Canadian government and the taxpayers that actually came to the rescue.

So Canadians are there for their banks, and we'll stand behind them, but there are limitations where we draw the line.

Mr. Paul Szabo: This is really important to me, because in the current environment the schedule I banks, our top five banks, have had a cocoon environment of sorts, but MacKay is now saying, let's open it up to more competition.

We'll set mergers aside. Here's our banking and insurance and credit union and trust company system right now; we want more competition in Canada. In fact MacKay is saying, let's have more foreign competition, let's have deposit insurance and the payments system, the cheque clearing system, for more financial institutions. So that puts more competition for full-service banking before Canadians. Maybe I can get my good service for less, and I can shop around. I can do all this electronically. They're really thinking in cyberspace here.

• 1040

It really doesn't have a heck of a lot to do with it, other than what is the public's best interest. If we leave it totally the way we are today, the banks do have a privileged position they've been able to build, and for that we expect certain things. We have to determine how much it is, short of totally regulating banking in terms of not for profit when you have to invest everything back in.

The issue is if we open up the Canadian banking system to more competition so that it does provide Canadians with more goods and services at more competitive prices, does that then change our right to restrict the existing banks?

Mr. Jeff Cooke: I'll answer that very easily for you. The one thing we're forgetting to add about this is Canada is a very unique and diversified country, and the problem is if you allow foreign banks in, they'd locate in major centres. They're not going to come into the community of Tignish and other small communities. So you're going to have a situation of allowing foreign banks into, say, Toronto or Halifax, and they're not going to go into every office. They're not going to spend the capital on bricks and mortar that have been already laid here. So it's a very difficult scenario as to how you actually lay down the game plan for ING Bank or for Wells Fargo, because you and I both know they're not going to spend the money coming to Charlottetown. If we want to see them, we have to fly to Toronto or wherever.

If that happens, the other Canadian banks are going to lose market share. That's great for the sophisticated people. What about the farmers, the fishermen, and some of the other people who make up Canada? They don't have fax machines. They don't have computers. They are hard-working people, and they will be hurt by that.

The Vice-Chair (Mr. Nick Discepola): Thank you, Paul.

Some of them don't even have 911 or Touch-Tone services.

Mr. Jeff Cooke: Yes. It's coming.

The Vice-Chair (Mr. Nick Discepola): My community is one of them.

Mr. Pillitteri, please.

Mr. Gary Pillitteri: Thank you very much, Mr. Chairman.

Thank you very much for your presentations.

Rural Canada is no different from P.E.I. Take a look at parts of Ontario, Manitoba, and Saskatchewan. They're no different from what they are here. If you take away the few large centres in Canada, then there's a lot of rural Ontario, and this rural Ontario has been served well. Our banking institutions have done a fantastic job. If you go outside our own environment, you could see we're being served well.

The insurance companies have had the opportunity since 1992 to open up banks. This is nothing new. You have had the opportunity to open up banks the same as the banks would have to do it, that is, through branches and through a separate entity in order to operate in Canada. Of course the insurance companies have chosen not to do so, because they like to feel they're in. I think it's a little bit more than they'd like to feel to be in.

I think you hit the nail on the head, Mr. Cooke, when you said we haven't been able to become large. There are 120 different insurance companies in Canada. The reason there's only so many of you is because you have the provincial charters, the same as the credit unions. By the way, the credit unions don't want to become banks. Most of the large credit unions have come forward, so you don't really have to worry about that. They just want to have large markets here. They've done their own polling, and they say individuals don't like banks.

Canadian banks have had a totally different charter since the early 1900s that applied across the country. So they have been living in a protected environment. More and more has been going on, and we've given them more protection.

One thing that is mentioned is the foreign banks. The foreign competition, which has appeared before different committees, is not prepared to come in with bricks and mortar. I think more competition should come in, be it from the banks, insurance companies, or from outside. Yes, competition is good.

• 1045

I just wonder what kind of competition I would want in my country and your country, Canada. Do we want to see the competition that you have in the United States? There's so much competition and so many banks. There are almost 10,000 banks. You never know from week to week how many of them are going to go down or how many are going to go bankrupt.

By the way, I think the MacKay task force is a good study. It's an excellent study. But I wonder if he's just copying the wheel instead of totally reinventing the wheel, which is what you have in the United States in banking. They're legislated by states, and there are more than 10,000 banks. If they go into a merger and open up a bank here in Canada with $10 million, there could be a lot of them.

Could they survive? That's the question. I don't think they could. What happens when they don't survive? It's “buyer beware”. Who's going to be owning it next and how much do they guarantee that?

So my question to you is this. I understand the fact of rural Canada, but something has been lacking, and that lack, if they want to make it to a national issue, is the access to capital for small businesses. That's where these individuals from outside are coming in.

What powers should we be given if we bring in or formulate different banks here in Canada? What powers should they have in order to serve our small communities and communities across the country? That's given that those individuals, those banks, from outside banks who want to come in here don't want to put in the bricks and mortar.

Right now, they have to pay a 5% deposit that Canadian banks don't have to pay. Maybe they'll want that taken away. Should we give them the same rights as our Canadian banks by bringing in the competition of foreign banks in Canada or with the creation of banks?

The Vice-Chair (Mr. Nick Discepola): Mr. Shea.

Mr. Terry Shea: I don't think they should be given the same rights. I think there should be some kind of a restriction put on foreign banks. I don't want the floodgates opened. I don't want the Canadian consumer to be left holding the bag, as you insinuated. I think some of the restrictions should be downplayed a little. There shouldn't be so much regulation on foreign banks entering the Canadian marketplace, but I still don't think they should be able to operate in exactly the same way as the Canadian banks do. I think Canadian banks should be given a little more leverage.

The Vice-Chair (Mr. Nick Discepola): Mr. Cooke.

Mr. Jeff Cooke: Allowing foreign banks into Canada, as I said to Mr. Szabo, is a very complicated issue in how you go about it. If they do come in, what will the consumer get? Will they get lower mortgages? With today's mortgage rates, I don't know if they can go much lower. Are they going to get more privileges or cheaper rates?

There was a show not long ago with Peter Gzowski. I watched Mr. Cleghorn and Mr. Baillie make the comment that Canadian bank fees are about one-third of those in the U.S.

Now read between the lines: if they merge, they get 70%, and I don't need to tell you what's going to happen to the fees. So then if we're not going to have the bricks and mortar, what do I do in little old P.E.I.? Who do I go to? Yes, you're right, maybe it'll be the telephone, but a lot aren't that sophisticated. It's a very difficult issue.

There's one thing I'm concerned about, though, with respect to the foreign banks. My concern is that the government or legislators will not allow the merger, possibly, but then in turn, they'll hand over the financial institutions sector to them. So after the fact, they'll say they'll give you this to offset your losses over here because they're going to bring in foreign banks.

We're talking a lot about bank mergers in this, but I'm concerned about the issue of the banks retailing insurance, as we talked about. In Quebec, for example, back in 1989, there were 27,000 brokers in Quebec. They lost approximately 1,000 brokers because the caisses populaires took over selling insurance in their own branches. Bill 188, which I will not go into at this specific time, even increased those powers. And if you read the MacKay task force report, he doesn't talk about Bill 188, but basically what he's saying is exactly what Bill 188 did. So if I just use the Quebec example alone, you can see what's going to happen to your brokerage forces across Canada: less competition. There'll be more competition at first, but once they get enough market share, competition will erode and thus they will control everything.

• 1050

You talked about the U.S. It's my understanding that, by law, not one U.S. bank in any one state can control more than 10% to 15% market share.

Mr. Gary Pillitteri: It's 30% in any one given state.

Mr. Jeff Cooke: Excuse me, 30% in any one given state. Well, I knew there was a cap.

Anyway, if you look at the bank merger, is it 70% of the banking industry that the two banks will control? That's pretty huge. For new foreign banks to come in to start competing against that— I think that's why some foreign banks have actually pulled out, with the 5% deposit— and I don't know if they can still compete.

The Vice-Chair (Mr. Nick Discepola): Are you saying that providing extra powers to foreign banks or other similar institutions will not create the necessary competition that we're trying to achieve?

Mr. Jeff Cooke: I'll put a question to your question. When you say “competitive”, in what way do you mean “competitive”? Are you talking about money for small businesses? Are you talking about lower fees and mortgages for the individual Canadian? When you say “competitive”, that's a big word. There are many sections of the banks that it could include or not include.

The Vice-Chair (Mr. Nick Discepola): All of the above. Obviously, those are the concerns of Canadians.

I have another major concern. How do we encourage people to take up the slack that the banks will forego in closing branches in rural Canada, for example? I don't see even the foreign banks doing that. If it's not good enough for Canadian banks, how will anyone be induced to open up a branch in a rural community where other institutions have closed down?

Mr. Jeff Cooke: I can't see the foreign banks doing it. They're not going to come in and open up an office in Tignish.

The Vice-Chair (Mr. Nick Discepola): But what Mr. Pillitteri is asking is whether there's something we could do, legislative or otherwise, to maybe encourage them, even if we have to give the smaller foreign banks an additional protection.

Mr. Robert Morrissey: Would you mean having them come into small-town Canada first before they get access to the full market?

The Vice-Chair (Mr. Nick Discepola): Anything intriguing.

Mr. Jeff Cooke: What about groups like Canada Trust and National Bank? They're two specific banks that I mentioned. Maybe they'll do it with initiatives, even more so than your foreign banks.

A voice: What about the cooperative movement?

Mr. Robert Morrissey: How much confidence would I have in the Bank of Chile opening a branch Tignish? I don't think I'd have much.

Mr. Paul Szabo: It'd be their choice.

Mr. Robert Morrissey: I know, but it goes back to what the Canadian banks have earned over the years. I think everybody agrees that they are recognized as stable institutions. We—meaning Canadians as a whole—do have a lot of confidence in the banking institutions, whether it involves your savings or whatever you have. I doubt if foreign banks would earn much clientele in small-town Canada.

The Vice-Chair (Mr. Nick Discepola): They've been successful in the niches that the banks traditionally have not wanted to go into. The Wells Fargos of the world have gone in and have produced a product that businesses will consume. As a small business person, if I was refused a certain loan, I was more than willing to pay a 1% or 2% premium. In the States, it seems to be the norm to be able to pay a 6% premium, and even 8% sometimes. Wells Fargo has come in and has been very successful over the past two or three years, but they're not going to provide the competition that we want for the big ones.

Mr. Robert Morrissey: Where have they—

The Vice-Chair (Mr. Nick Discepola): They're throughout Canada.

What are the figures, Paul? Typically, where would Wells Fargo have opened operations in Canada?

Mr. Paul Szabo: They have no operations.

The Vice-Chair (Mr. Nick Discepola): They have no operations, no infrastructure at all.

Mr. Paul Szabo: Their operation is completely electronic.

A voice: They did it through the mail. They were very successful.

Mr. Paul Szabo: They did a mail-out and got something like 18,000 applications for loans from Canadian businesses that had been turned down by Canadian chartered banks.

The Vice-Chair (Mr. Nick Discepola): So it's a very simplified process, which is what small businesses have always asked for. They have a one-page application, with an answer within 24 hours.

Mr. Paul Szabo: They had to stop taking applications, they had so many.

Mr. Jeff Cooke: But what happened to FBDB? I used the Federal Business Development Bank. I guess I'll go back to that question. If you have Wells Fargo doing that, it must tell somebody that there's a real need out there. Where is the Federal Business Development Bank? Why aren't they doing that?

The Vice-Chair (Mr. Nick Discepola): Because they don't have the mandate to take the risk that Wells Fargo is prepared to take.

Mr. Jeff Cooke: There's your competition. Maybe that's the vehicle you have to use. Start structuring FBDB to be more of a forceful vehicle. If the national banks don't want the small business, then let's structure it so that the FBDB will do it.

Mr. Robert Morrissey: I'd be intrigued to look at the one the FBDB turned down and Wells Fargo picked up.

Mr. Paul Szabo: That's what I had to do as well.

The Vice-Chair (Mr. Nick Discepola): Are there any?

Mr. Paul Szabo: Yes, and they're very happy.

The Vice-Chair (Mr. Nick Discepola): Mr. Robichaud.

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Mr. Ulysse Robichaud: You just touched on the credit unions. Why wouldn't they be given certain initiatives to start selling insurance, like in Quebec? One of the reasons they did it in Quebec was that people were not getting what they should have been getting from the big banks. Even in Quebec there was a problem.

As I said before, in small, rural Acadian areas, in the old days it was the same person who sold insurance and had the credit union, because there was a need there. Sometimes little communities have not been served the way they should be even by insurance companies in this country.

Not being served in your own language is very important. That's why the credit union movement has been so strong. It's the same with the Caisses populaires. Assomption Vie in New Brunswick is very strong because you're being served in your own language. For a long time, you were not. The credit union gives you that opportunity, because it's the people who own it. I don't know if I'm off the topic here, but it is like the co-op movement. That's just the way I see it from our point of view on this matter.

A lot of the time, big business, whether it's insurance or big banks—sometimes I put them in the same category—is looking for profit. From what I heard today, one guy's trying to make the other guy into the bad guy. For us, the consumers, sometimes they're both the bad guys because they're big and they don't really care sometimes. That's why we feel that, with the co-op movement, you at least have your own people there. They do care and they do give you service in your own language, which even in this province hasn't been the case when you go to buy your insurance. When I buy my insurance, I have to deal in English in Charlottetown, unless I go to New Brunswick or to the Evangeline area. There's a need to improve their services so that if I do pick up the 1-800 number, maybe I will be served in French. I don't know.

The Vice-Chair (Mr. Nick Discepola): Then shouldn't you be in favour of mergers? That will encourage more cooperative movements to take up the slack.

Mr. Ulysse Robichaud: From that point of view.

The Vice-Chair (Mr. Nick Discepola): You were concerned—

Mr. Ulysse Robichaud: I was, but if that would create a new point of view, then maybe—

The Vice-Chair (Mr. Nick Discepola): The Mouvement Desjardins is very excited about the idea of the bank mergers going through. They see all kinds of market opportunities and service levels that they can achieve.

Mr. Ulysse Robichaud: That may be the last positive thing that could come out of it.

The Vice-Chair (Mr. Nick Discepola): Mr. Pillitteri.

Mr. Gary Pillitteri: Thank you very much, Mr. Chairman. You took four of my ten minutes.

The Vice-Chair (Mr. Nick Discepola): No problem. I did it very well.

Mr. Gary Pillitteri: Let me say one thing, gentlemen. Having also been on the Liberal task force, and having been in this committee many times over five years, I come to the point where I conclude that the banks really have, without a doubt, provided us with an excellent service. As you stated, Mr. Morrissey, they're not really afraid of the competition coming into Canada from the outside provided that the competition puts in the bricks and mortar. That's why I threw that caveat out there, really.

Even they don't worry about being taken over. Some chairmen of the banks have said they really don't want to worry about the 10% rule. You could increase it or get away from it altogether. At that point, my dilemma is that we've reached the point where they're large enough. There's no doubt about that. There's no fear of competition for them, so they don't care. You don't go putting fear into the banks, because they're big enough to take care of themselves. They have a marketplace.

I want to ask this question. How do we address small-town Canada? After hearing the reports and hearings, there's really almost nothing you could do to force the financial institutions to stay in small-town Canada. It is for other institutions to take up the slack. They could be credit unions or whatever; some people want to start up community banks. But the fact is that, realistically, they don't fear the competition. It's only hearsay that the competition's coming in from the outside, so how do we try to serve small-town Canada?

Interest rates are the lowest they have ever been. The Americans have higher interest rates. Anywhere else you go in the world, they're much higher. They big banks are risk-takers. They're multinational. They're all over the world. Forty percent of their total income is from outside. So we just want to see what the best way is to serve communities in small-town Canada that are not being served. They're walking away from it, and you're right, nobody else is going to help you.

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The Vice-Chair (Mr. Nick Discepola): Maybe I'll take Mrs. Redman's final question, and then I'll ask you to wrap it up in answering the last two questions.

Mrs. Redman, please.

Mrs. Karen Redman: Thank you, Mr. Chair.

Actually, my questions can sort of segue from Mr. Pillitteri's. It's basically that the MacKay task force is forward-looking. We have a real picture of what's happening right now, the fact that banks are making record profits, interests rates are down, and our fees are much lower than those in the United States. But if we're looking 10 or 20 years down the road, what are consumer demands going to be? What are their needs going to be? What can we do with these recommendations—124 of them—that is going to help meet those needs?

I think MacKay is acknowledging something that Canadians have demanded of the financial sector, that they be more entrepreneurial, and we've seen that with the collapsing of the four pillars. A lot of his recommendations speak to a greater blurring of those lines, but definitely focused on consumer needs.

We look at smart cards and ATMs. Is maybe part of arming the financial institutions for the next millennium the fact that there are some short-term, difficult decisions that 5, 10 or 15 years from now may meet those unfolding consumer needs?

If we're going to look down the road—we know what we have now—does the MacKay task force deal with the kind of emerging needs? Is that a good crystal ball?

Mr. Jeff Cooke: If I look down the road, at insurance specifically and not bank mergers, if I can paint this picture— Banks for some reason are granted selling insurance in their branches and they continue to get the market share, as CIBC has demonstrated—they've been doing it outside of it, so I can imagine what it would be if it were done within the environment—if we look out 20 years from now, they would have huge market share. Most of the insurance companies in Canada would not be here. The ones that are U.S.-owned would probably retract because they know they cannot compete because of the tied selling and everything else. Of the brokers that are here in small communities, most of them would be gone, as demonstrated in Quebec, if we can use examples.

So now, all of a sudden, you are driving and you're insured with the Royal Bank, and you come into an unfortunate situation where you have a couple of accidents. What will happen is that the bank most likely will drop you, but they won't give you a choice, because they only sell their product. All of a sudden, then, you're going to go to the street and say, well, I have to find insurance. But now you're going to wake up and say, but there are no 230 insurance companies in Canada to give me that selection.

If we head down that road, which is wide now, to go to a very narrow road, then in 20 years' time the consumer is the one who will actually be hurt, because their choice will be gone.

As I said earlier, we do not mind banks competing against us, but in their own entity—that is, the Personal, or RBC Insurance, or whatever it's called. I think Glacier is the Bank of Nova Scotia's. If they want to set up their own insurance companies, that's fine, outside of the bank. At least the consumer can walk out the door and decide whether they are going to go up the street to the Personal's office or to my brokerage. At least they have a choice.

But if we allow them in— we both know they have an unlimited resource. The profits of insurance companies come from underwriting, so they don't have other income they can run to, whether it be bank fees or mortgages, to hide those losses.

I don't know if you saw the numbers, CIBC's recent numbers of the Personal Insurance's insurance results, but they are not very good. But because they have such huge resources, it can be somewhat massaged and hidden. So if you lose $500 million, that's not a big deal when you have the capital they do.

If you take that to a normal insurance company today, they have major problems, and they're going to have to react. They will react, and the prices will be affected. So looking down the road—

Mrs. Karen Redman: To follow that line, you said the prices would be affected. What does that mean to me, the consumer? My rates are going to go up?

Mr. Jeff Cooke: Right. You have a choice now of saying, oh, I don't like company XYZ because they just put my premiums up. You then go down the road, and you can go to 5 or 6 or 200 other insurance companies and get competitive quotes.

There are all types of quotation devices out there. There's Insurexplorer that can give you 10 different quotations right now by going on the Internet. You can pick which price you want, quickly, and it will even tell you the broker that sells it.

But if we go down the other road, with respect to allowing the banks, those choices will no longer be there for consumers in Canada, and you will find someday that they will keep all the good drivers, with no accidents. All that's going to be left, unfortunately, are the bad drivers, or not bad drivers but the unfortunate drivers, and those people are going to pay a huge amount of money for insurance, to the point where the consumer is in trouble.

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Mrs. Karen Redman: Thank you.

Mr. Terry Shea: Time's running out, I know, so I'll keep my answers very brief.

I'll first address Mr. Pillitteri's question of what we, or you folks with the House of Commons, can do for the small-town community. I don't have an answer to that question. It's something that bothers us greatly, because we live in a small-town community, the city of Summerside. It's a city, but it's still a small town.

I will say that increasing the powers of banks will only continue to erode the mortar and bricks in small-town communities. Banks will have more power, they'll become more independent, and they will not be there for the Canadian consumer. The more power they have, the more types of products they sell, the more independent they will become.

Looking down twenty years, what will the future look like? Again, it's hard to imagine what the future will look like twenty years from now. Twenty years ago we would never have envisaged sitting behind our computer and paying our telephone and electricity bills. I would never have dreamt of something like that. Change is rampant, and it's going to continue.

If the banks are given more power—for instance, to retail insurance in their branches and to use customer information—then I just dread to think of what it will look like twenty years from now.

I know that's not answering your question, but I don't feel I have an answer.

The Vice-Chair (Mr. Nick Discepola): If banks weren't allowed to get into leasing or retail insurance, would you be in favour of the mergers?

Mr. Terry Shea: No. As an individual, I'm not in favour of the mergers.

Speaking from individual experience, I can give you the example of a friend who had a small business. His current bank said they no longer wanted to deal with him because I guess his finances were getting to a point where the bank was uncomfortable. This person had a number of banks to go to, and although he was turned down at the next couple of branches, he eventually got what he wanted.

That happened ten years ago, and this business is now very financially stable. It's a successful business.

With less players out there, the options aren't there, and I think to the detriment of the Canadian consumer.

The Vice-Chair (Mr. Nick Discepola): Thank you. Paul.

Mr. Paul Szabo: Essentially what you're saying is that the mergers would decrease competition, but the MacKay task force is basically saying we want to open up the whole banking and financial services sector to more competition so there would be more choices. I think you have to face the reality that public interest means more choices, more options. If we do nothing—

Bank bashing is a Canadian pastime. Everybody says they hate banks, but boy, their branch is terrific. They like their bank manager and all those tellers, and know them all personally. This is not from the brain; this is from the heart. But the reality, it seems, and the question before us, is, do we do things in the financial services sector that will increase competition, that will allow credit unions to have all the facilities a schedule A bank has?

We have life insurance companies that take deposits now. They're doing banking. Is it becoming a hybrid sector of our economy, where everybody does a little bit of everything, and let those who do business well and who service well rise to the surface? Those who are not prepared to adapt and those who aren't prepared to provide good service and those who aren't prepared to participate in the community will not get the business.

Isn't this a consumer-driven business? Isn't an educated consumer the best consumer we could have, one who knows they have options? The question is, where is the vision? The mergers are not meant to reduce competition. The MacKay task force says we have to increase competition.

The Vice-Chair (Mr. Nick Discepola): I'll allow each of the presenters a couple of minutes to reply and then we'll wrap it up, please.

Mr. Robichaud.

Mr. Ulysse Robichaud: With regard to the question on how to serve the rural communities, I don't have the answer, but I'd like to ask the committee a question: How do we decentralize?

“By opening up competition, maybe”, I was told, but will opening up competition decentralize? I think the key is to decentralize the system.

• 1110

What I would like you people to look at is how do we decentralize this huge system, as we're trying to do with government? Maybe that's what your committee could look into in the future, the question of decentralizing this huge system, whether it's insurance or banks. The problem to me is the same. It's decentralize it so we can be served in our own little communities.

The Vice-Chair (Mr. Nick Discepola): From a rural perspective I understand, but from a worldwide perspective it seems to be globalization, which means centralizing more.

Mr. Shea.

Mr. Terry Shea: Competition is great. I think competition right now is at an all-time high, and I think competition has to be on a level playing field, which it is right now. Insurance companies are on a level playing field with us and things are working out fine.

In terms of service to the consumer, I think insurance companies, insurance brokerages, are providing at present an excellent value to the consumer.

In terms of how will decentralization happen, I don't think decentralization will happen by giving banks more powers. I think it will lead to centralized jobs, moving people to larger urban centres, and less jobs in rural communities.

Thank you.

The Vice-Chair (Mr. Nick Discepola): Mr. Morrissey.

Mr. Robert Morrissey: I agree with the comment made that the bank mergers and the whole MacKay report is based on the premise of increasing competition, but I do not see how it will increase competition in rural parts of this country that we must serve. That's my concern with this. I know the premise is right coming from us, and I don't have a problem with that, but I'm not sure how it's going to improve my area.

As to the question made by the other gentleman of how do we do it, I don't have the answer. As federal parliamentarians, you will have to look at that, but I do not agree you should legislate anybody to be any particular place. I don't think that's the right format to follow. I don't have the answer, but I would like to see a solution. I think Canadians would be more comfortable if they could clearly see how they're going to be served in this new, larger environment.

The Vice-Chair (Mr. Nick Discepola): Good point.

Mr. McInnis.

Mr. Dan McInnis: My concern is that your committee asks where else in the world would a merger be allowed to happen where somebody would get such a large piece of the market? As far as foreign competition and globalization are concerned, I don't think that's really what's at stake here. What the banks are doing, I think, is staking out this country and basically saying they're going to dominate this market, and the way they can do that is by having most of the market share; they can create barriers to entry, etc. I think what your committee can do to help small-town Canada in the first place is to say no to the bank mergers.

The Vice-Chair (Mr. Nick Discepola): Thank you very much. As you can see, our decision is not an easy one. It's a decision we must take very seriously, and we must make sure we make the best decision in the interest of all Canadians, no matter whether they live, in urban centres or rural centres—no matter where they live.

Mr. Szabo.

Mr. Paul Szabo: You may want to advise that should these particular merger proposals be accepted by the Competition Bureau as being acceptable applications, there will be full cross-Canada public hearings on those particular applications. So this isn't the end of it.

The Vice-Chair (Mr. Nick Discepola): Thank you very much for that input.

I would like to conclude by thanking you for taking your time to make your views and opinions heard. I tell you that as a parliamentarian I'm often enriched by hearing people such as yourselves at the local communities, because it makes my job at times not easier, but I'm a hell of a lot better informed and I can make a much better decision for it. So thank you, and we will look forward to a report in March some time. And the continued saga goes on—I hope not for too long.

Mr. Morrissey, we did spend lots of money here. I discovered that P.E.I. lobsters cost as much here as they do back in Montreal, but we certainly enjoyed them.

Mr. Robert Morrissey: Probably globalization.

The Vice-Chair (Mr. Nick Discepola): Thank you very much.

The meeting is adjourned.